What is financial literacy? It’s having the skills to make smart money decisions. In this article, I’ll lay out the three main components of financial literacy, then add some thoughts about the topic that are top of mind for me.
First, have a budget, spending plan, whatever you possibly decide to call it that makes it into a positive thought in your mind. A budget is truly crucial to financial success. Start by setting time aside for a review of your expenses. I’ve heard people refer to it as their money date night. If you feel too restricted setting up monthly amounts to spend on certain budget items, never fear. I always tell my clients that spending awareness is the most important step. I specifically review my expenses for the purpose of seeing where I’m spending too much money. Often, it’s dining out, entertainment and AMAZON. I also compare three months of expenses (exclude December and birthday months where you will inevitably spend more). I compare our family’s spending to rules of thumb for each category, but I don’t limit myself to an exact amount for groceries or household goods each month. I focus on discretionary expenses like entertainment for cutting back. Ask us for a spending plan template or check mint.com.
The second component of financial literacy: Having an emergency fund! This is nothing new to hear from SFG. It’s part of our initial financial plan, and you’ll hear us asking about this frequently in review appointments. The goal is to accumulate at least three to six months of living expenses in a savings account separate from your checking account. I have to say that this is especially key, right now because my clients with a healthy emergency fund are the ones that seem to be the least worried about the market downturn. Having that money set aside provides some peace of mind.
Debt management is the final component of financial literacy. Unless your needs are very, very small, you are bound to take on debt at some point in your life. I don’t know anyone who can buy a house outright with cash, and most cannot buy a car that way either. Be smart about debt, shop for good interest rates, and don’t borrow more than you can afford to pay back in an adequate amount of time. When or if you feel like you are in over your head, seek the services of an organization like OnTrack Financial Education and Counseling. They have counselors that provide one-on-one consultations to help you get back on track.
Some other thoughts about financial literacy: It’s never too early to start teaching your kids financial literacy. It also seems to be a subject that gets bypassed in schools. That is changing, however. North Carolina became the twentieth state to require high school students earn a credit in financial literacy in July 2019. So, it’s important to address with your kids at all stages. You might remember from a previous blog that Emery accomplished her first financial goal last year. She wanted a toy that I was not willing to buy, given she had just gotten new toys. We set up a system and she saved her own money, with some matching funds from Papaw, and achieved her goal.
This past Christmas, Emery got her first calculator. Hot pink, no less. She is learning to add and subtract, so we let her use it to check her work. It comes in handy when she makes “goods” like playdough food to sell us. She serves us in her pretend restaurant and then gives us a bill, expecting payment. So, she gets the concept of what money is used for in our system.
As kids get older, there are a slew of ways to teach financial literacy. Dave Ramsey has a whole financial program specifically tailored to teach kids about money. The apps for young adults are nearly endless: Venmo, Greenlight, Digit, YNAB, and so on.
It’s important to give your children real world examples or they will think of money as play money. For example, help them create their own financial goals for wants, set up an allowance, or get them involved in a family financial goal. A family goal could be a cool vacation they have always wanted to go on. Come up with the overall budget, including airfares, hotels, and activities. Then, break down how you are going to put the money aside to reach the goal. A $5,000 trip broken down over twelve planning months is $416 goal per month. The kids can play their part by taking responsibility for raising their own spending money for the vacation.
What about learning financial literacy as an adult? I leaned on our very own financial guru, Dawn Starks, for her top book picks on the subject. As you likely know, Dawn is an avid reader on all subjects, so these books have already been vetted. We have some of these books in our own library for lending.
Mecham, Jesse, You Need a Budget
Hirshman, Susan, Does This Make My Assets Look Fat?
Paine, Crystal, The Money-Saving Mom’s Budget
Richards, Carl, The One-Page Financial Plan
Sabatier, Grant, Financial Freedom
Robin, Vicki, Your Money or Your Life
Chilton, David, The Wealthy Barber
Stanley, Thomas and Danko, William, The Millionaire Next Door
Clason, George, The Richest Man in Babylon
Mellan, Olivia, Money Harmony
Hill, Napoleon, Think and Grow Rich
Orman, Suze, Nine Steps to Financial Freedom
Bach, David, Smart Women Finish Rich
Any opinions are those of Jennifer Adams and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice.