Financial Literacy: What it Is and Why You Should Care

If you want to live a rich life on your own terms, and who doesn’t, financial literacy is key. Because freedom is not free, it requires financial knowledge, planning, strategy and execution. Once you have designed your ~~dream~~ rich life it’s time to build a strategy on how you’re going to achieve it. That’s what takes it from a dream to a reality.

Your strategy for building your rich life needs to include gaining basic financial knowledge, developing a positive money mindset, and sticking to the rules of the road on your investing journey.

Why Is Financial Literacy and Education Important?

If you don’t manage your money effectively, you’re at risk of experiencing stress, anxiety, insomnia, depression and even relationship problems.

But don’t worry, the good news is, having a good understanding of basic and fundamental financial concepts enables you to make smart decisions about your money. When you’re effectively managing your money, you’re on your way to being free of financial stress!

“Formal education will make you a living.
Self-education will make you a fortune!”
– Jim Rohn

The Basics of Money Management Are Actually Quite Basic!

You don’t need to be an accountant, or have a finance degree, or even be good at math to successfully manage your money. If you just wrap your head around a few key foundational concepts and learn to get out of your head and drop the money myths you’ve been holding onto, you’ll be set.

Personal Finance Basics:

Here are six foundational concepts of personal finance you’ll want to master.

Financial Goals: Setting clear goals helps you stay motivated to achieve specific objectives, such as buying a house, paying for school, traveling or retiring comfortably.
Budgeting: Creating a budget involves tracking your income and expenses to ensure that you are living within your means. You can allocate funds for essential needs, wants and savings. It can be as detailed, or as high-level as you want. Read this to determine the bare minimum you need.
Debt Management: This involves understanding the difference between GOOD debt (investing and in some cases) and BAD debt (e.g., credit cards, loans) and managing them responsibly. Paying off high-interest debt and using credit wisely are essential components of financial well-being. I am an ex-credit card business manager and can tell you, you’ll never reach financial security if you’re carrying credit card debt. The cards are designed and marketed to keep you in an endless debt cycle. Credit Card debt is the biggest roadblock to financial freedom.
Emergency Fund: An emergency fund is a savings buffer meant to cover unexpected expenses like medical bills or job loss. You need an emergency fund to prevent you from going into debt during unforeseen circumstances. It also has benefits, providing you time to consider your options before making a decision you may regret.
Saving: Many people live in the moment and fail to set aside a portion of their income for future needs and goals. The trade off of giving up a little now, for more freedom later, pays dividends, usually in the form of less stress, purchase of a home, or enjoyable experiences and holidays.
Investing: Investing involves putting your money into assets such as stocks, bonds, or real estate with the aim of growing your wealth over time. Investing is NOT about picking stocks! Investing will help you achieve long-term financial goals and beat inflation through the magic of compound interest.

If you’re not investing your money, you’re losing money every year, due to inflation, typically about 3% a year.

What Are the Most Common Roadblocks to Financial Freedom?

Financial freedom is critical to living a rich life. And the top roadblocks to financial freedom are FEAR and DOUBT. You need to understand how to wipe out fear and doubt, and replace them with Courage and Confidence.

So what’s stopping you From Mastering Your Money?

Misunderstanding or lack of understanding about Finance

We FEAR what we don’t understand. Review each of the personal finance basics above until you’ve got a handle on each one and know how it fits into your overall financial plan. I told you they were pretty basic, right? Knowing these concepts will allow you to dispose of doubts, build your confidence and hopefully stop you from delaying any longer.

Warren Buffett, considered the best investor of our time said “Risk comes from not knowing what you are doing.” A little bit of research reduces a lot of risk.

A Poor (pardon the pun) Money Mindset

Most of us formed our ~~money mindset~~ myths about money in our youth. We saw how our grandparents or parents felt and thought about money. Or maybe we knew someone who experienced financial challenges, lost money in a bad investment or never saved enough money. We sabotage ourselves with our doubts and negative thoughts. And this is not likely the first time you’ve heard this. So why hasn’t it clicked? Remember, I said the basics of financial literacy are pretty basic, and simple. But it’s not EASY.

Simple Vs Easy

Don’t confuse simple and easy. Money management is based on simple facts that anyone can understand with just a wee bit of research. But it can feel hard because we’ve been telling ourselves stories for years on why we can’t get a handle on our finances. Sometimes we play the victim, “My parents or teachers never talked to me about finances”, or “I can’t make my credit card payment because the company gave me such a high rate”.

Other times we bury our heads in the sand and hope our financial issues will go away. My cat does this every time he goes to the vet. He buries his head in the crook of my elbow, imaging he’s in a better place. Somewhere where he’s not about to get a shot in his ass. But you and I know how it all ends. He’s going to get the shot, it’s going to hurt for a short time, and he’s going to be healthier and happier in the long run. But the whole time he’s hiding (or in his case jumping on top of the highest cabinet and making the assistant climb on top to retrieve it), he’s only delaying the inevitable and making things worse.

Hiding from our financial challenges, hoping they will disappear guarantees your life will be hard long term. Hope is not a strategy and waiting to save and invest makes things much worse. So it’s time to pull your head out, stop avoiding your finances and start fixing them. It’s only hard for a short-time and in the long run you’ll be healthier and happier.

What Are the Keys to Success?

There are some really important rules of the road for your investing journey. The good news is, these have been tried and tested by incredibly successful investors. Which means you don’t have to do anything but follow their lead.

Start Early. The more time in the market, the less you need to invest and the greater your returns, thanks to Compound Interest! I have more of a Jimmy Buffett mindset, so when I hear this quote below from Warren Buffet, I’m always picturing myself in a hammock under a shady palm tree, sipping a margarita. I’m thankful to both men for their wisdom. Read this for advice on money and life from Jimmy Buffet.

“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
– Warren Buffett

Set A Goal. You’ll need a goal to keep you focused and motivated over time
Know Your Risk Profile. This will depend on factors like your age and planned retirement date.
Select Low Cost Index Funds. Index funds offer more choices and lower costs, and a target-date fund is an easy way to invest for retirement without worrying about asset allocations. Don’t pay for a financial advisor, as their fees will eat away at your returns.
Diversify. Across asset class, sectors and markets to weather market volatility
Automate. Set up your savings and investments to build wealth consistently and avoid temptations
Take a Long Term View. It cuts down on costs of constant trading, keeps you from selling and allows you to compound any earnings you receive from dividends.

“The first rule of compounding: Never interrupt it unnecessarily.”
– Warren Buffett

This last one is key. You MUST take a long term view of your investments, which is why automating them – setting them up and forgetting about them is crucial.

No one is immune to financial mistakes. One of my greatest ones was selling my bank stock in 2012 when it was at rock bottom thanks to the global financial crisis. I was working at a Financial Consulting firm at the time. They required me to submit massive amounts of paperwork to describe all of my investments, to ensure there was no conflict of interest.

Given the bank was a client, I thought it was easier to just dump the stock since it was “worthless” anyway. I was given the shares at $235 per share in 1999 (a value of over $85,000), it rose to $350 a share 7 years later (Approximately $125,000 value) and dive bombed to a low of $4 per share. This is when I sold my shares for about $1500.

Although it is unlikely to match its peak in the early 2000s, if I held the stock, it would be worth roughly $20,000 today. I sold it because my mind told me it had “lost value”, while in reality I received the stock as an option of employment and didn’t pay for it. So it only lost its value when I sold it at the bottom of the market. A mistake I won’t make again.

On the topic of uninterrupted compounding, I often have my real estate clients ask me if they should take money out of their retirement accounts in order to invest in property or buy their first home. If you’re considering this, remember, do not interrupt compound interest!!

NEVER make early withdrawals of your retirement accounts for anything other than emergencies like financial hardships. Never for buying a home or paying for higher education. Instead, consider student loans and focus on savings plans to save for a home deposit. Work with your realtor and lender to find a loan product with the most favorable down payment and rate combinations.

Why Is It So Important for Me to Be Financially Literate?

Money buys time and time buys freedom and freedom leads to happiness.
Financial literacy provides clarity and confidence, which empowers you to take control of your future.
Being financially literate helps you build a safety net, manage debt, and save for emergencies and retirement. This leads to greater financial security and reduced stress..
Financial literacy helps you recognize and avoid common financial pitfalls, such as falling into high-interest debt or making poor investment choices.
Financial literacy enables you to set realistic goals and create actionable plans to achieve them, like buying a home, starting a business, or traveling the world.

In a rapidly changing economic landscape, being financially literate empowers you to navigate life’s financial complexities with confidence. When you control your finances, you control your future. Psychology shows feeling in control of your time is a huge happiness booster.

Live Richly. Find Happy.

Learn more about building wealth and your rich life at liverichly.blog

You’ve mastered the basics of money management – now what?

Congrats! You’ve made it to Milestone 2: Educate Yourself. You’ve learned the basics of personal finance and identified the roadblocks that were holding you back!

Now, learn more about the other 5 milestones on your journey to living richly!

Milestone 1 – Envision the life you want to live. Define what living richly means to you.

Milestone 2: Educate Yourself. Learn the basics of personal finance and identify the roadblocks that are holding you back!

Milestone 3: Execute. Create a budget, plan to reduce debt, and set up automatic saving & investing plans

Milestone 4: Enough. Determine how much is enough. Enough time to spend working, enough money to provide happiness. What is the true value of money to you and how much of your life are you willing to trade for it?

Milestone 5: Evolve. Monitor your progress and learn from your experiences. Adjust and adapt your financial plan to accommodate learnings and changing life stages.

Milestone 6: Elevate Your Finances – You have achieved a solid foundation – free from financial stress allowing you to focus on Living Richly. Learn how to celebrate your success without getting off track.Financial management in an ongoing journey more than a finite destination. How to put your new found knowledge and experience to work to further elevate your finances, pursue new goals, and contribute to your long-term happiness.