How to Become Financially Literate
What’s the best way to ensure your financial success for the long term? Crack the books, take a class, hire someone?
Actually, those are all great ways to become financially literate. Financial literacy is a lifelong journey — it’s not one that you can read about in five minutes or learn through osmosis (unfortunately).
Becoming financially literate involves five clear steps. Here’s how to build your library of financial knowledge.
What is Financial Literacy?
First, what are the basics of financial literacy, anyway?
Learn How to Budget and Track Spending
One of the most important areas of financial literacy is learning how to best track your spending so you know where your money is going. You’ll know where you’re spending too much, where you could improve and ways you can optimize your budget for success.
Create an Emergency Fund
You never know when you’ll need to buy a new vehicle because your current vehicle’s been in and out of the shop 36 times since March. An emergency fund is there for just that — an emergency. Is it for funding a luxurious vacation or for spending on a new vehicle just because you’re tired of your other one? No. It’s for true emergencies, such as medical expenses or home repair emergencies. It’s best to have at least six months’ worth of expenses on hand in an accessible account like a money market account or savings account.
Calculate Interest and Returns
Calculating interest and returns sounds like a snooze fest, right? It’s actually really exciting!
Let’s put it this way. If you don’t learn how to calculate interest — on the amount you spend on a car loan, mortgage, etc. — you may never realize how much money you’ll spend in interest over time. For example, let’s say you buy a $200,000 home. You pay 4% interest over 30 years and your payment is $954.83. You’ll end up paying a total of $343,739.01 if you never pay a penny extra on your mortgage. That might be the motivation you need to make one extra mortgage payment per year. Doing so reduces the amount of money and time you spend on your mortgage!
Calculating how much you’ll get in returns is more fun. Calculating returns can help you figure out how much you’ll earn over time with your investments. It’s fun to figure out what a 10% return can do for you!
Pay Off Debt
Swimming right alongside the mortgage conversation is paying off debt — but this includes more than just mortgage debt. Add credit card debt, car loan debt and more. What debt do you owe and what’s your approach to paying it off? There’s an entire industry based on debt consolidation, debt counseling and staying out of debt. Get help if you need it. Paying off debt may be one of the most important factors in your long-term financial success.
Save for College
Saving for college can seem like a daunting task, but do you know how much money you’ll help your child save over the long run if you save now? Whether your child’s a high school junior or kindergartener, saving for college is a must. Learn college savings strategies every chance you get. College isn’t getting any cheaper, but that doesn’t mean you forget about saving at all. Save as much as you can and implement a tuition installment plan once your child is in college.
Plan for Retirement
Retirement planning is one of the most important (if not the most important) aspects of financial planning. Naturally, it involves a bird’s-eye view of long-term financial planning. These days, it’s super easy to calculate how much you’ll save over time and project what compounding interest will net you over time.
What’s compounding interest? It’s interest on the initial principal — it includes accumulated interest from previous periods on a deposit or loan. It’s interest on interest and it’s one of the best ways to earn money over time.
Assess Your Goals
What do you really want out of life? Do you want to be financially free at 50? Be able to freelance and travel the world, owning only the contents of a suitcase?
What’s your life look like in your wildest dreams? Use those ideas to formulate your goals for the future.
If you say you want to retire on a lake in the Smoky Mountains, how are you going to make it happen?
What Does it Take to be Financially Literate?
Anyone can be financially literate. It just takes a little bit of know-how and a desire to implement everything you learn. Here’s how to become financially literate.
Step 1: Read everything you can.
Zzzzz… right? No! Money books these days engage an audience. It’s so important to read about the basics of financial literacy and now, you can do it in a fun way! Most books come jam-packed with stories, anecdotes, quotes and examples about everything from building an emergency fund to saving for retirement.
Not really into reading? Listen to an e-book instead, or listen to a podcast. Pick up a magazine. Find a blogger that rocks your world — you can find so many great blogs out there that give great financial advice.
Figure out the best way you learn. Are you a visual learner? Look for YouTube videos. Are you an auditory learner? Listen to podcasts. Need a checklist? Google it.
Step 2: Create a budget and learn to track your spending.
Remember why it’s so important to budget? Check out two free budgeting sites: Personal Capital and Mint. Use them to track your spending so you know exactly what you’re spending in each area of your life. Personal Capital and Mint both tell you where you’re spending extra money, where you could improve and more. It could be one of the most important things you do to sharpen your financial literacy.
Step 3: Choose the ways you feel comfortable investing.
You may not feel comfortable choosing an online broker and handling all of your own investments. Would you rather make friends with a financial advisor to help you organize your investing strategies?
That’s okay! It’s better to do that than never get started at all. Many books, podcasts and magazines encourage you to DIY everything — but that could be where you completely miss the boat. Be honest with yourself. Are you going to flounder if you sign up for an online broker, left to your own devices? Or will you flourish?
Here are some questions to ask a financial advisor if you decide that’s the best route for you (remember, your first conversation is always free!):
- Are you a fiduciary? (Are you obligated to work in my best interest?)
- How do you get paid?
- What are my costs? What are my tax obligations?
- What are your qualifications?
- How do you take my risk tolerance and needs into consideration?
- How often will we meet to discuss my finances?
- What are your success measurements?
- What brokerage do you use?
If you’re not interested in hiring a financial advisor, do as much research as you can about an online broker before you march forward.
Step 4: Assess Your Needs Over Time
Things change! For example, when you were 20, you might have started saving for a skydiving trip in the Andes with your best friends. By the time you hit 30, you may have a full-time job, six kids and a pet llama in the backyard.
You ain’t going to the Andes anymore.
Same with your money goals. Could that initial $1,000 you saved for Peru fit better somewhere else? Maybe you now want to allocate that toward college savings or retirement instead.
Consult with your financial advisor at one of the best investment firms in your area or do it yourself — just make sure the asset allocation you’ve chosen still makes sense.
Rebalance your investments as needed. Rebalancing simply means buying or selling assets in a portfolio to maintain the right level of asset allocation or risk. Here’s what that means:
Let’s say you have a portfolio filled with 99 percent stocks. You suddenly realize you’re a bit older, so you change your asset allocation to adopt a few more bonds — maybe you’re comfortable with 80 percent stocks and 20 percent bonds. That way, your portfolio aligns with your age, goals and risk tolerance.
(Your financial advisor could always handle this for you if you’re completely intimidated.)
Step 5: Take a Course.
Don’t forget to add to your financial repertoire by taking personal finance courses, whether you take them online or in person at your local community college. Some financial advisors offer courses as well.
Some courses offer basic financial literacy and others offer hours (or days!) of instruction. You can choose a course based on your comfort level, budget and how much extra time you have on your hands.
A Practice in Lifelong Learning
It’s a snap to take a short course on financial literacy, but to be honest, it’s best to adopt a lifelong learning mentality when you want to become financially literate.
Consider getting some great partners on your side — remember, many financially successful people don’t get there alone. They rely on trusted advisors, from lawyers to tax advisors to financial advisors to help them achieve their goals.
About Melissa Brock
Melissa Brock is a 12-year veteran of college admission, founder of College Money Tips and Money editor at Benzinga. She loves helping families navigate their finances and the college search process. Check out her essential timeline and checklist for the college search!