April is Financial Literacy Month, and was officially designated as such by the US Senate in 2003. Why did they take the step of designating an entire month to financial education? Because the people in this country are woefully undereducated when it comes to their own personal finances, and there needs to be an effort to help people figure out how to improve their financial situation.
I believe that personal finance blogs can play a part in that education process, and as such I thought that today I’d write an article talking about why financial literacy is so important.
Financial Literacy: Why It’s Important To Me
I haven’t always cared as much about personal finance and financial literacy as I do these days. Growing up it wasn’t something we talked about much. I did see my parents being frugal and stretching every dollar in the budget, but retirement accounts or compound interest weren’t exactly topics of conversation.
I got my first checking account in high school, and learned to balance a checkbook after getting my first job at our local grocery store. While it was a shaky start, I think I had a basic grasp on how financial things worked. Then I went to college and discovered credit cards, and the lure of having things I wanted now, but paying for them later. Why not do it if I could afford the payments?
Only after having to pay off those credit cards slowly over a few years did I realize that I didn’t like having those debts hanging over my head, and decided that I would do my best to pay cash for things from then on.
A few years later I married my wife and we paid off my remaining non-mortgage debt, my student loan, and ever since we’ve paid cash for pretty much everything we’ve bought, including our cars. Still, we weren’t as financially literate as we could have been. Our entire mindset and outlook on money changed, however, when we took Dave Ramsey’s Financial Peace University through some friends who were teaching it at our church. We learned it was OK to be counter culture, and to live without using a ton of debt and credit cards. Paying cash, investing and paying off your house can be cool!
Getting our financial house in order and becoming financially literate has saved us from “unexpected” expenses countless times since we’ve paid off our debt. Because we understood the importance of saving up an emergency fund, paying for things with cash and properly insuring ourselves, we avoided huge debt when my wife was in the hospital for a month in 2008 (to the tune of $250,000), or when I had to have my appendix out right after we got married. We understood that everyone will have unexpected expenses, and knew that we should be planning ahead. Why? Because we’re all going to have unplanned expenses sooner or later. Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time. So it’s only a matter of time.
The Basics that I’ve Learned
So what are some personal finance basics that I’ve learned in my journey to be come financially literate?
- Spend less than you earn and live below your means: It seems to be just common sense, but it’s amazing how many people just don’t live their lives on less than they’re earning. They assume that they’ll be getting raises or earning more in the future, but if they don’t they end up in big trouble. One thing that is common among self made millionaires is that they have a knack for living below their means and saving. They can afford expensive things, but they choose to buy only what they need.
- Plan ahead for eventualities: It’s important to plan ahead with a budget, and make sure you save an emergency fund and insure yourself against unplanned negative events. It will happen.
- Pay yourself first: You need to make sure that you’re making saving and investing for retirement a priority. Try to take that money out first and you won’t even miss it.
- The power of compound interest: It’s important to start saving as early as you can, so that you can enjoy the benefits of compound interest. If only I had started saving when I got my first job back in high school!
Those are a few of the basics that I’ve learned, what things would you add to the list?
Financial Literacy Takes Time
Becoming financially literate isn’t something that happens overnight, like anything it takes education and practice to learn all the things you need to know. If you’re starting from ground zero I’d recommend taking a class like Dave Ramsey’s Financial Peace University, Crown’s Money Map or a similar financial education class. Read financial blogs like this one, read books on saving and investing and start researching the topic. Start tracking where your money is going and if you’re out of debt, start saving and investing.
Tell us your about your journey to financial literacy, and what financial education tools you used along the way!
My family atmosphere was similar to the one you mentioned. My parents were in great control of the finances, but they never sat down to explain interest rates, budgeting, or savings. Thankfully, I was able to watch and hear the basic message from them of living within my means, but the specifics cam with time as you said. Now I’m thankful for resources like Dave Ramsey and this site to discuss specifics. Particularly the emphasis on saving is a great long-term focus. Keep encouraging people to be more financially literate. It’s been a great resource to me and tool to pass on to others.