Americans are increasingly failing when it comes to financial literacy and money management. Financial literacy is the education and understanding of various financial areas including topics related to managing personal finance, money and investing. Money management is the process of budgeting, saving, investing, spending or otherwise overseeing the capital usage of an individual or group.
While the two are related, they are not one in the same. Financial literacy is education and knowledge of money while money management is the process whereby financial literacy is applied. One cannot manage money effectively without financial literacy.
To increase financial literacy, an individual should get educated on money and finance. Understanding basic financial principles such as compound interest, the time value of money, saving, investing, managing debt, financial planning and tax planning is essential. There is so much to know and learn, do not expect to gain an in depth understanding overnight.
Money and finance are complex, yet delicate, subjects. A financially literate individual has the capacity to make better financial choices and decisions. A financially astute individual will always count the cost before paying the price. For example, the biggest mistake that most consumers make at a car dealership is telling the salesperson the monthly car payment amount they are comfortable with for a car note. It does not matter the interest rate or the term, most times a car salesman will get the consumer to that “magic number” without the consumer ever considering the impact the interest rate and term have on the overall price of the vehicle.
To become a better money manager, an individual has to first set financial priorities and goals. I always admonish my clients to establish the top, three financial goals that will get them closest to their financial freedom. Once priorities are established, an individual has to become more astute and savvy with their daily, routine spending. Simple things like participating in loyalty rewards programs of grocery stores, gas stations, airlines and hotel chains can save hundreds of dollars over time. Finally, an astute financial person will always weigh the total cost before paying the monthly price. This is extremely important when making major purchases for appliances, automobiles and homes.
A financially literate consumer also understands the importance of credit worthiness. Many do not know but an individual with poor credit will spend at least $250,000 more in interest in their lifetime as compared to an individual with excellent credit. That is a quarter of a million dollars! Imagine if that interest savings could be invested. With compounding interest and the passage of time, a nice nest egg can be accumulated.
As a financially literate consumer, an individual should not engage in impulse spending. All purchases should be planned and well thought-out. Set financial boundaries and spending limits for all purchases.