Finsights

I remember the first time I held a $5 bill in my hands – taken from my dad’s open wallet on the dining table when he wasn’t paying attention. I was about 5 years old, and to me, it was just green paper with a bearded, unsmiling man that had no meaning. However, that same day, I saw my dad use that $5 bill to buy a lot more at McDonald’s than you can now. As I got older, I wanted to know what the value of that green paper was, why it had that value, who gave it that value, what it could be used for, and how to get more of it – because clearly they were quite useful. Fast forward to today, and I have the answers to the first four questions, but not the fifth, which explains why I have no money in my pockets.

In my quest for understanding money, I’ve come across a particular term many times: financial literacy. In simple terms, financial literacy is the ability to use financial knowledge to make confident decisions about and with money. But why is it so important?

Take my mother, for instance. While she has a Masters degree and is extremely educated, she doesn’t necessarily have an understanding of budgeting, wealth and debt management, investing, and retirement planning, among other “financial literacy” concepts. As such, she didn’t have a direct ability to build and manage wealth over time. Unfortunately, she also couldn’t actively plan for her retirement. She expressed her concerns to me on this topic, explaining how if she had this knowledge when she was younger, she could have been more savvy with her money. More importantly, she would be better set up for her future. 

Today, only 57% of adults in the United States are financially literate, according to a survey from Standard and Poor’s (S&P). Furthermore, over 40% of Americans don’t know how various investment vehicles work, such as money market accounts, Roth IRAs and high-yield savings accounts.

And that is why financial literacy is so important – the concept of financial literacy is having a good understanding of monetary concepts, to the point where you don’t have to worry about making life-changing decisions like buying a house, leasing a car, investing in stocks, or retiring. 

I don’t have all the answers – I’m learning just as much as you are. That’s why I created this blog – not because I know everything, but because I’m on a journey to attain financial freedom… because the next time someone has a financial dilemma, they will be more educated and confident about making a decision. And as to who this blog is for? Well, it’s for everyone – kids in high school looking to manage the money they get from working small jobs, college students looking to manage their finances so they don’t go broke in their 4+ years at university, college graduates looking to start their careers and families, and older individuals who don’t have a complete grasp over what they should be doing with their money to live the rest of their lives stress-free. So let’s dive right in.

Budgeting

There are a lot of concepts in the topic of financial literacy. For now, I’ll focus on the most basic one: budgeting. 

So you’ve got your first paycheck from your new job. You’re all excited, ready to do some online shopping – all those exclusive deals, attractive clothing…

Woah. Pause. Take a deep breath. What’s the one thing your parents always told you to do when you got your first paycheck?

Save. Or more specifically, create a budget. It’s one of the most efficient ways to manage your money and a really good way to make sure you’re not overspending. So how do you create one? 

Step 1: Decide how you’re going to track your income. There are many ways to do this, but some of the most efficient ways are using a budgeting app (like Quicken or Mint) or Excel. 

Step 2: List all income streams, from jobs to investment income. The key is to track what you are earning monthly. 

Step 3: Figure out how much of your money will go to expenses, such as rent, food, loans, and utility bills. These are fixed costs, or the money you must pay every month.  

Step 4: Decide how much you will save each month. A rule of thumb is to save 20% of your monthly income, but depending on your expenses, that percentage can change. Keep some on hand as cash, but put the rest into a bank account or a retirement account like a 401k (more on this later). 

Step 5: Make sure that part of your savings is an emergency fund, which is a cash reserve used for emergencies. It’s recommended to have three to six months of expenses worth of savings in your emergency fund. The important thing to remember is that it’s a special part of your savings that cannot be touched: no matter what you want to buy, unless it’s an emergency, you shouldn’t be using the money in your emergency fund.

Step 6: After you’ve calculated how much money is going into expenses and savings, decide how much you can spend on things you want: restaurant meals, luxury items, vacations. But honestly? I think it’s better just to save the rest of your monthly income after expenses. Charlie Munger, Warren Buffett’s closest partner and right-hand man, said, “‘I don’t care what you have to do,” “If it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000.’” 

That first $100,000 is hard, but once you have that foundation, the road to more wealth becomes much easier to handle. So even if you have to say no to your friends who are going clubbing every weekend, just do it. You’ll thank your younger self later.

In the interests of keeping things simple, this is where I will leave you today. Hopefully you have a better understanding of the importance of financial literacy and how vast the field is. In coming issues, I will speak more about today’s economic crises and how they connect to financial decision-making. For now, keep these tips in mind, and feel free to ask questions or write your own tips in the comments below. As I said, I am no expert in this field, just an individual passionate about money and its intricacies. Definitely let me know if anything I wrote is inaccurate or could be explained better, and I will keep it in mind for upcoming articles. Until then, keep learning, and keep being financial savvy!