A recent article from the Australian Financial Review stated that “Australian’s financial literacy went backwards between 2016 and 2020.” Given the information age we live in where so much educational content is at our fingertips this information is concerning. Other concerning aspects of this article “Declines in financial literacy were larger among people aged under 35 than those in older aged groups. Women scored lower than men across all age groups in both years.”
Whilst you could say that this is only in Australia, our hunch is this trend is replicable across most of the world.
According to a CNBC report “Only 57% of adults in the United States are financially literate, according to the Milken Institute. While a majority of parents say they are responsible for teaching children about finances, 31% say they never talk to their children about the topic, according to a CNBC + Acorns and Momentive survey.”
Looking at the UK, a FT article from January 2022 states “Nearly half of UK adults say they need urgent help managing their day-to-day finances as the cost of living crisis and rising energy bills threaten to plunge millions of household budgets into the red.”
The article then goes on “As financial pressures multiplied, 44 per cent of adults said they would be in much better shape financially if they had been taught basic money management skills such as budgeting.”
These above numbers are very scary! However the good thing is this can be rectified.
What is financial literacy?
According to the website Investopedia financial literacy “is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. The meaning of financial literacy is the foundation of your relationship with money, and it is a lifelong journey of learning.”
The Smith Family website goes on to describe financial literacy research “Research has shown that people with limited understanding about money matters are more likely to have lower education levels, be unemployed, receive lower incomes and have minimal savings”
Obviously the earlier you build up your financial literacy the better shape you will likely be in.
Why is financial literacy important?
According to The Borgen Project “Financial Literacy plays a significant role in reducing poverty and improving financial well-being.”
The more financially literate you become the likelihood your financial position will become more prosperous. You will be less likely to lose money on scams or dodgy investments, less likely to rely on government entitlements at retirement and likely to lead a more enjoyable and less financially stressed life.
Essentially financial literacy is the main way for you to get ahead with your financial situation.
How to improve your financial literacy?
Do whatever you can to educate yourself on all aspects of financial education. If your financial education is low or very basic, you can visit government websites that have some great basic information and resources for the financially illiterate.
Regarding your personal finances, you should start with understanding where all of your money goes, all of your debt levels (if applicable), your most recent credit score and all income that you or your household earns.
From there expand into learning about emergency/buffer funds, the basics of investing, ways to make extra money, buying a business, insurances, legal and estate planning, just to name some topics. Read up everything you can about finance and about goals setting and success. Listen to financial podcasts or watch financial videos.
Look for people who were in a similar situation to you or who came from a similar background to you and became financially successful or seem to be. Ask questions to these people, learn their story, learn their mistakes. Read about successful people and is there anything you can learn from their journey to help you on yours?
Also beware of some of the crap that is on social media. Remember that a lot of social media is just an image. If someone is posting pictures of themselves in fancy cars and private jets this doesn’t mean they are financially successful. This could all be a show for likes and shares to build their “brand”.
Finally with any information that you read (including from this website), listen or watch about financial literacy (or anything financial really), don’t just take this information as being correct. Challenge this information to see if it really holds up, if it will really help you. Remember what worked for one person may not work for another. Question everything, stay on your own path at your own pace and you’ll eventually get to your financial destination.
Track all your income and expenses
Further to your overall financial education, you also want to have an intimate understanding of your own financial situation. At a basic level you need to know where all your money goes and what amount of money comes into your household. You also want to know all the debts you have and all assets that you hold.
If you’ve never done a personal financial audit or haven’t done this in a while start here.
List out all the debts that you have (including money owed to family) and don’t forget to get a copy of your credit report. Leave no stone unturned when reviewing your financial position. Next move on to how you spend your money. If possible look at the last 6-12 months of bank and credit card statements and get an understanding of where your money went.
The same goes with your income. What exactly did you and your household earn over the last 12 months? List any income you or your household earnt over the last 12 months. This additional income could have been through a cash job you’ve performed or any government benefits you have received.
Now you have your starting point, let’s look to expand your financial mindset.
Set savings and financial goals
Unfortunately when financial literacy is low not only can this imply a lower class of living, the concept of understanding finances or financial planning is likely a foreign concept. This includes setting financial and savings goals or even something simple such as having a savings buffer or an emergency fund for 3 months of lifestyle expenses.
Financial goals can be a great way to start your successful financial journey.
If you are a beginner to this concept, start small. Some basic financial goals could include saving $100 per month or $500 per month. Another goal could be to pay extra off your credit card repayments to make sure you are paying down the debt rather than the minimum expenses.
From there you can expand to building your own personal automated financial hub where all income and direct debits go through the one account and any surplus is transferred to a higher interest savings account and eventually used for investments.
Don’t forget to set long term financial goals, for example a financial independence goal as well as smaller goals that last anytime between 1 month to 12 months. Ideally your smaller goals will be part of or aligned to your longer term goals.
You can also use goal setting in other areas of your life such as health and fitness or learning a new skill.
Reduce your debt, limit new debt
Debt (well at least private non deductible debt not linked to an appreciating asset like property) is something to be avoided as it can really set back your financial goals. High interest debt such as credit cards should definitely be avoided particularly if you are using this to fund lifestyle costs such as new clothes, shoes or a holiday. The path to financial oblivion usually starts with a young person and a credit card.
Touching on the point above set a financial goal around your debt. This could be a simple goal to pay off an additional amount each month or a more extreme goal could be to pay off the whole credit card or loan within a short period of time i.e 12 months.
Several popular debt repayment repayment methods include the snowball method and the avalanche method which involve paying down the credit card or loan with the smallest debt first (regardless of the interest rate) i.e the snowball effect, or focus on the loan or credit card with the highest rate of interest (regardless of the size of the debt) i.e the avalanche method.
Ideally the higher interest debt would be repaid first (higher interest rate, higher interest repayments) however there can be psychological benefits of seeing a small debt paid off and the enthusiasm increases as you get further into your debt repayment.
If you can’t afford something and it is important to you then save for it. Set a financial goal for a large expense or luxury item that you can treat yourself with; however don’t sabotage your future financial wellbeing by chasing meaningless consumer items that only give a moment of satisfaction. Focus on investing not spending and making sure you invest in yourself.
Build your investments
A long term financial goal for many people is financial independence and the way to get there is to build investments that will hopefully replace your current full time income. Don’t be overwhelmed by the enormity of setting a goal like this, start small and keep building.
After you’ve reached your emergency fund goal and have built up some savings, look to use these savings to go towards quality investments. For a lot of you there may be a hesitancy to invest particularly due to a lack of knowledge or experience however this shouldn’t deter you from investing.
Find an area or sector that you have an interest in or that you would like to learn more about and get busy learning. Find out all the information you can, look for successful people in this field and find out what success tips they might share. Reach out for people in this field who can help improve your knowledge.
For example you might be interested in real estate but may not know much about this. Don’t be afraid to reach out to a local real estate agent and pick their brain, give them a bit of a background about you and what you are looking for and see what they come back with. You might get lucky and find someone that is very helpful and can guide you in the right direction. Alternatively you might find someone who is not so helpful or trustworthy so do your best to cross check any information that you are given, you can never do too much research!
When you are finally ready to take that leap, dip your toe in. This could be a small share or managed fund purchase when you are ready to invest in the stock market or you could decide to back yourself and build or buy your own business.
Ideally your investment time frame is long term and you’ll make good investment choices with investments you’ll keep for years. Look at successful investors such as Warren Buffet who usually holds his investments for years.
If there comes a time where you do choose to sell, sell on your terms, not when you are forced to sell. Only invest when you can afford to invest, all your investments should stand on their own and should be independent and if one of your investments does fail the effect on your other investments should be minimal at best.
Finally, never invest anything that you can’t afford to lose (i.e investing next month’s rent or mortgage payment on the latest meme stock or cryptocurrency) and always do your research regarding the risks of investing in that particular asset or investment sector.
Help and educate others
Once you’ve gotten to a high level of financial education and financial stability or success, it’s time to help others in your life who could do with some help. If you have children, get them to learn as much about finance and investing from an early age. Important topics and subjects such as budgeting, the pitfalls of significant personal/credit card and personal debt and the power of compounding in regards to investing should be taught very early to children.
On the other end of the age scale if you have elderly relations or acquaintances who might not be financially savvy or may struggle with technology and be susceptible to online scams you can help educate them or refer them to education that will help improve their financial understanding.
Whilst it may not be easy to have finance discussions with friends or family you could at least send them some quality information from the previously mentioned government website or forward them recommended videos or reading materials or even a quality podcast to help them on their path to better personal finance education.
Just because you weren’t brought up in a financially savvy household or weren’t exposed to learning about finances when you were growing up doesn’t mean you need to carry this through your life. Draw a line in the sand and start taking control of your financial destiny TODAY! Learn everything you can about finance, about saving, about investing.
Find and read about as many financially successful people. What did they do, where did they invest, what background did they come from? What was their starting point? Look for people who have become successful when starting from a similar starting point to you.
Finally take action today in your journey for financial freedom.