Financial Literacy

by Mr. Common Cents

Instead of spending this entry discussing different methods to save, more wisely spend or picking on some esoteric topic of money, I’m instead going to sound off on something that is a little closer to my heart.

It is my opinion that we are in the middle of a REAL crisis in this country, and this has nothing to do with the housing market, credit crunch or food prices (although all of these are symptoms of this national malady). Now, if anyone actually knows me, they know how much I loathe the sensationalism of news stories and the media’s constant overuse of words like “catastrophe”, “disaster”, and “crisis” (but we’ll leave this rant for another time). This dilemma has been so slow in creeping up that it is currently infecting entire GENERATIONS now and even when people see it, they think there is nothing that can be done.

I’m talking about financial literacy.

There is a great vacuum of financial literacy in this country and it currently shows no signs in being filled. The difficulty with this situation is that financial instruments are becoming increasingly complicated and at the same time people are less knowledgeable when it comes to financial matters. The biggest problem though is that instead of facing up to the problems at hand, people are sticking their heads in the sand, shrugging their shoulders, or giving up entirely when it comes to learning about money.

Money is treated with kid gloves in this world and is still a taboo subject. We will talk freely about political affiliations, our marriage problems, even our SEX LIFE, but when I start discussing money, people actually look offended! Guess what? Money is the one thing that touches EVERY aspect of your life and you better learn about it or your life will most certainly become a mess really fast. Trust me, I’ve been there.

Like Trent at The Simple Dollar, I had once found myself in big trouble financially and was forced to either turn my entire life around or become another statistic in the financial slaughterhouse. During those years, I had time to reflect on the things I’d spent my money on, my spending habits, how I acquired these habits, and what the future held for me. I realized that if I was to have any amount of control over my life, I would have to learn how money “worked”.

So, I took classes in basic finance, accounting, and even a *gasp* class on federal taxes. In addition to learning how to pay off debt efficiently, I learned about investing and now I find myself reading up on the market and other financial things on a regular basis.

So what has this done for me?

The biggest difference is that I no longer dread opening up bills. Because I follow a simple budget, I know I have enough money to make it through every month and every bill. Because I have an emergency fund I don’t worry too much about my wife or I losing our jobs because we are prepared. Because we have financial goals and a plan to accomplish these goals, we don’t have to worry about retirement or our childrens’ college tuition.

But unfortunately, I truly believe that many people will read this and think, “It’s just too late for me,” or “I’m not smart enough to understand that stuff,” or even “I’m not rich enough to think about that stuff.” Well, if you’ve gotten this far, give me three more minutes.

It’s NEVER too late to fix your finances.

You ARE smart enough to understand money.

If you have two pennies to rub together, then you NEED to understand how they work.

Too Late? Never. Even if you are in your 50’s and 60’s, any little thing you can do to fix your financial future will benefit you and those around you. Balance your budget (i.e. spend less than you make). Get your will updated. Make sure you have your financial and insurance papers in order for emergencies. All of these things little things add up. Now, sure, if you’ve made a disaster of your financial life and your one year from retirement, are these things going to save you? No. But could they help? They couldn’t hurt.

Not smart enough? No geniuses necessary. Sure dealing with money seems a little daunting what with ETF’s, Hedge Funds, CDOs, etc… The good thing is that you do not need to know all of these fancy financial instruments and techniques to be a fiscally responsible consumer. Learn the simple stuff first before adventuring out into the crazy-lands. Focus on understanding compounding interest, amortization and basic investment vehicles (bonds, CDs, mutual funds, stocks). These are simple matters that everyone can understand and please remember that if you don’t understand a fund or investment instrument, don’t invest in it. I don’t play baccarat at a casino for a reason and that’s because I don’t understand it. Yes, I might get lucky once in a while and make some money, but I will eventually lose and lose big.

Not rich enough? No such thing. The reason most people don’t have money to manage is because they didn’t manage their money properly in the first place. The simple act of being responsible with your money actually makes you more money! By following a budget, making responsible purchases and financing decisions, following your plans and saving, you will soon be surprised to find yourself having more money than you’ve ever had in your life.

So what? What does this mean to me?

Just like basic literacy (reading and writing) should be encouraged to our kids, financial literacy is something that we have the responsibility to pass on as well. By learning how money works, we begin to understand more of the world around us especially now that so much we do in life revolves around money. In addition to this, more fiscally responsible consumers lead to less bankruptcy, less consumer debt, more individual savings, healthier and more fulfilling retirements, and more market stability (all of which I will relate in future blog posts). So overall, by helping yourself, you also help the whole.

We hope this makes cents.