What’s the best way to ensure your long-term financial success? Break the books, take a course, hire someone?
In fact, these are all great ways to gain financial knowledge. Financial literacy is a lifelong journey — it’s not something you can read in five minutes or learn by 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 expenses
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 overspending, where you could improve, and how to 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 has been in and out of the shop 36 times since March. An emergency fund is there for that: an emergency. Is it to finance a luxurious vacation or to buy a new vehicle simply because you are tired of the other? No. This is for real emergencies, such as medical bills or home repair emergencies. It’s best to have at least six months of spending on hand in an accessible account like a money market account or a savings account.
Calculate interest and returns
Calculating interest and returns sounds like a snooze fest, doesn’t it? It’s really very exciting!
Let’s put it this way. If you don’t learn how to calculate interest – on how much you spend on a car loan, mortgage, etc. – you may never realize how much money you will be spending on interest over time. For example, let’s say you buy a house for $200,000. 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 more on your mortgage. This may be the motivation you need to make an extra mortgage payment per year. This reduces the amount of money and time you spend on your mortgage!
Calculating how much you will get back is more fun. Calculating returns can help you determine how much you will earn over time with your investments. It’s fun to see what a 10% return can do for you!
Pay off the debt
Swimming right by the mortgage conversation is paying off debt – but that includes more than just mortgage debt. Add credit card debt, car loan debt and more. How much debt do you have and what is your approach to paying it off? There is a whole industry based on debt consolidation, debt counseling and getting out of debt. Go get help if you need it. Paying off debt can be one of the most important factors in your long-term financial success.
Save for College
Saving for college may seem like a daunting task, but do you know how much money you’ll help your child save in the long run if you save now? Whether your child is in college or kindergarten, saving for college is a must. To learn savings strategies for college every chance you get. College doesn’t get cheaper, but that doesn’t mean you forget about saving at all. Save as much as you can and set up a tuition payment plan once your child is in middle school.
Plan your retirement
Planning for retirement is one of the most important (if not the most important) aspects of financial planning. Naturally, this involves an overview of long-term financial planning. These days, it’s very easy to calculate how much you’ll save over time and predict how much compound interest you’ll earn over time.
What is compound interest? This is the interest on the original principal — it includes interest accrued 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 from life? Do you want to be financially free at 50? Being able to work independently and travel the world with only the contents of a suitcase?
What does your life look like in your wildest dreams? Use these 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 get there?
What does it take to be financially knowledgeable?
Anyone can have financial knowledge. All it takes is a little know-how and a desire to implement everything you learn. Here’s how to acquire financial knowledge.
Step 1: Read all you can.
Zzzzz… right? No! Money books these days engage an audience. Reading the basics of financial literacy is so important and now you can do it in a fun way! Most of the books are filled with stories, anecdotes, quotes and examples on everything from building an emergency fund to saving for retirement.
Not really a fan of reading? Instead, listen to an e-book or listen to a podcast. Take a magazine. Find a blogger who rocks your world – you can find so many great blogs out there who give excellent financial advice.
Determine the best way to learn. Are you a visual learner? Find YouTube videos. Are you an auditory learner? Listen to podcasts. Need a checklist? Search it on Google.
Step 2: Create a budget and learn how to track your spending.
Remember why budgeting is so important? Check out two free budgeting sites: Personal capital and mint. Use them to track your expenses 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 hone your financial literacy.
Step 3: Choose the ways you feel comfortable investing.
You may not feel comfortable choosing an online broker and managing all your own investments. Prefer to befriend a financial adviser to help you organize your investment strategies?
Its good! It’s better to do that than never start at all. Many books, podcasts, and magazines encourage you to DIY everything, but that may be where you’re completely missing the mark. Be honest with yourself. Will you flounder if you sign up with an online broker, left to your own devices? Or will you flourish?
Here are some questions to ask a financial advisor if you decide this is the best path for you (remember, your first conversation is always free!):
- Are you a fiduciary? (Are you obligated to work in my best interest?)
- How are you paid?
- What are my fees? What are my tax obligations?
- What are your qualifications?
- How do you take my risk tolerance and needs into account?
- How often will we meet to discuss my finances?
- What are your measures of success?
- What brokerage do you use?
If you’re not interested in hiring a financial advisor, do as much research on an online broker as possible before jumping in.
Step 4: Assess your needs over time
Things change! For example, when you were 20, you may have started saving for a skydiving trip in the Andes with your best friends. By the time you hit 30, you can have a full-time job, six kids, and a pet llama in the garden.
You won’t go to the Andes anymore.
Same with your money goals. Could that initial $1,000 you saved for Peru better go elsewhere? Maybe now you want to allocate that to college savings or retirement instead.
Consult your financial advisor at one of the best investment firms in your area or do it yourself – just make sure your chosen asset allocation 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 is what this means:
Let’s say you have a portfolio that is 99% filled with stocks. You suddenly realize you’re a bit older, so you change your asset allocation to embrace a few more bonds – maybe you’re comfortable with 80% stocks and 20% bonds. This way, your portfolio aligns with your age, goals, and risk tolerance.
(Your financial advisor can always handle this for you if you’re completely intimidated.)
Step 5: Take a course.
Don’t forget to enrich your financial repertoire by taking personal finance course, whether you take them online or in person at your local community college. Some financial advisors also offer courses.
Some courses offer basic financial literacy and others offer hours (or days!) of instruction. You can choose a class based on your comfort level, budget, and how much extra time you have.
A practice of lifelong learning
It’s child’s play to take a short financial literacy course, but to be honest, it’s best to adopt a continuous learning mindset when you want to learn financial skills.
Consider having great partners on your side. Remember that many financially successful people don’t do it alone. They rely on trusted advisors, from lawyers to tax advisors to financial advisers, to help them achieve their goals.
Melissa Brock is a 12-year college admissions veteran, founder of College Money Tips and editor-in-chief at Benzinga. She enjoys helping families manage their finances and the college search process. Discover it essential schedule and checklist for college research!