According to Wikipedia, “financial literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.” And though that is an accurate and succinct definition of what financial literacy is, unfortunately too often the necessary skills and knowledge that an individual requires aren’t usually made available to them – not in elementary or high school systems, not in most colleges or universities, and typically not in the home either. As a result, most young people go out into the world woefully unprepared to effectively manage their financial lives.
This lack of preparation has real-world consequences. Many students will leave college with a large sum of personal debt – not to mention student debt – and so often they are starting out their lives in a deep financial hole from which it can be difficult to emerge.
Furthermore, unless one is independently wealthy, all of us have to allocate the income we earn and we are all subjected to the impact of the financial choices we make – whether it’s buying or leasing a car, purchasing a home, educating our children, taking out a loan, paying taxes, or preparing for retirement. Too often people do not budget or plan for these events because they don’t sufficiently understand the decisions they should be making, and so they do nothing. And that lack of action ultimately has negative consequences, for themselves and their families.
Let’s take a look at some of the basics which comprise a solid financial literacy foundation:
Budget – Essentially a budget is a plan; a plan that tracks all of your income (money coming in) and all of your spending and expenses (money going out). It can also provide, at any moment, a snapshot of your current financial status and total net worth. Many people resist the impulse to budget but it really is the cornerstone of a productive financial life. Thankfully, there are some valuable online tools which make the budgeting process easier to navigate, Mint.com being one of the better ones in my opinion.
Credit – Effectively managing credit is a key factor in establishing financial success. Too often people will wantonly spend more than they can afford, using their seemingly “magical” credit card, without realizing the longer-term impact this kind of behavior can produce – an excess of personal debt and higher interest rates on consumer and mortgage loans, which can be very costly over time.
Checking – Almost all of us maintain some kind of relationship with our bank of choice. Whether it’s to have a checking account for the writing of checks, for the direct deposit of our paycheck, or to use a debit card from which purchases can be made. The important thing is to use a checking account responsibly and to reconcile your account at the end of each month.
Savings – We all know that life can take unexpected twists and turns but the key is being prepared for them. Regularly putting aside some savings to establish an emergency fund will go a long way to providing some protection in the event of an adverse situation. Plus, planning and saving for specific future goals is a tried and true means to achieve them.
Spending – Too often people will mindlessly fritter away their money on incidental things and then wonder, at the end of the month, where their money has gone. For those folks, keeping a spending journal can be an effective way to make them more aware of their daily spending habits and to curb their impulse for frivolous spending.
Investments – We live in a society where, for the most part, our retirement is self-funded, meaning we are responsible for generating the funds we will need to finance our retirement. Of course, there are some existing financial structures that allow us to accomplish that – 401(k) plans, IRA and Roth IRA plans, brokerage accounts, etc. In order to become educated about these kinds of subjects, I can highly recommend a website called Investopedia. It is a valuable resource for a myriad of financial topics, including the establishment of personal investments.
Financial literacy, and the resulting benefits from it, can have a tremendous impact on the quality of life for an individual. The subjects may sound simple – budgeting, spending, saving and investing, etc. – but their implementation (or lack of it) can have lifelong consequences, so it’s better to start sooner rather than later.
United Capital Financial Advisers, LLC (“United Capital”), is an affiliate of Goldman Sachs & Co. LLC and subsidiaries of the Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management and financial services organization. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.
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