It’s Financial Literacy Month!

Katie Martin, CFA, CFP®

April 9, 2021

April is Financial Literacy month. If you’ve followed my social media, you might already know that financial education is incredibly important to me – financial literacy leads to financial well-being.

When it comes to financial literacy, we face some hurdles. First, it’s not often a big focus in schools. Many states don’t require it as part of their school curriculum. That means more of the responsibility for educating our kids on money falls to the parents, and frankly, money just isn’t something many people like to talk about. If we don’t grow up talking about it, we’re left to figure it out on our own as adults.

Like it or not though, money is something that impacts everyone. Money is required to live. Fortunately, you don’t have to be a finance expert to be smart about your money. It has so much more to do with how you behave than how many investment classes you’ve taken.

Wondering what it means to be financially literate? Here are a few ideas on where to start, whether you’re a teen, college student, or adult:

• Money in vs. money out – Money is a scarce resource. Sure, there is always the opportunity to make more. However, once you spend it on something, it’s gone. This is why we need to develop good habit for how we’re spending our hard-earned money. We need to first cover those expenses required to survive (taxes, rent/mortgage, food, health care), then build up our savings to cover an emergency, and finally use what’s left for the things that fall into the bucket of “wants”.

The idea of making sure we take care of our needs before our wants is a simple concept that can be instilled in kids from a young age. And while it might seem straightforward and too basic for adults, don’t be fooled. One of the places we always start when creating a financial plan is understanding what our financial picture looks like today. Often, this includes taking a deep-dive into our income statement – what money is coming in and the various expenses we’re spending it on. It can be eye-opening to see just how much money goes toward things we don’t really need without us giving it much thought. One of the keys to financial health is making sure we don’t spend more than we bring in, so having a strong grasp of this early in life can be impactful.

• The basics of investing – Investing is how we build wealth over time. While you certainly don’t need to be an expert on the markets, you should have a basic understanding of how investments work and why investing is important.

The first concept is the compounding of returns, which means making money on our money. As a quick example, if our $100 investment earns a 10% annual return, we end up with $110 at the end of the year. The next year, a 10% return on our now $110 would earn us $11. The sooner we start investing, the longer our money can compound over time. This can make a big difference in how quickly we accumulate the assets necessary to reach our goals.

The second is risk vs. reward. In general, you need to take on more risk to earn a higher reward. Over the long term, stocks often generate higher returns than bonds or cash, but they also typically have higher highs and lower lows than the other investments. However, if you are investing this money for a goal that’s far off into the future, such as retirement, then you can often afford to take on a bit more risk since you’ll have time to recoup potential losses in exchange for the potential to earn a higher return.

• Understanding credit – Credit can be very useful. We don’t often have the lump of cash it takes to buy a house, for example, so we need to take out a loan. However, other kinds of credit, like credit cards, can be damaging if they aren’t used appropriately. Credit cards typically carry very high interest rates, and the longer it takes you to pay back your credit card balance, the more you will ultimately pay. (Remember compounding of returns? It’s the same concept.) The best approach is to pay off your credit card balance in full every month. If you’re not able to do so, then it’s time to revisit the Money In vs. Money Out section above.

That’s it – no Finance degree necessary. Not spending more than you earn, investing for future goals, and responsibly using credit are three keys to being smart with your money. The beauty is that it’s never too early – or too late! – to increase your financial knowledge.