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Reading, writing, and arithmetic… these are the things we were taught in school. But where was the most important class… you know, the one that could impact our financial future for the rest.of.our.lives?
I'm talking about financial literacy.
Stay with me here while I engage in a bit of background history. Interestingly enough, the concept of personal finance dates way back to 1947 when Herbert A. Simon, an American economist, and cognitive psychologist, suggested that "a decision maker did not always make the best financial decisions because of limited educational resources and personal inclinations."
Duh. It's hard out here in the real world!
Yep, we're living it every day. But what is financial literacy anyway?
The definition of financial literacy is "to understand money and how to manage it so that a person can make informed financial decisions."
That sounds about right.
Even when we know what we should do, it's not enough to make us actually do it. Financial literacy is extremely important, especially in this age of consumerism and constant streams of advertising and marketing coming at us from all sides. And being smart with your money is a good thing, regardless of where you fall along the income lines.
Yet, the households where financial literacy is supposedly "needed" most are also the ones who practice it the best.
Consider these two scenarios:
A single mom of 3 kids, working two part-time jobs is barely making ends meet, yet, she's making it work because she creates and sticks to a tight budget. She stays out of debt because she knows she can't afford the payments if she does, and she rarely goes out to eat (let alone take a vacation) because she simply can't afford it.
The average doctor out there earns a substantial income, yet is spending as much, or more than what they're making. They leverage their income in order to live a lifestyle they really can't afford - going out to eat at fancy restaurants, buying the cars, boats, toys and house everyone dreams of, and going on amazing vacations because they have the credit to do it.
So who is more financially literate?
This is what gets us all in trouble. The people who need financial literacy education, skill-building and habit development are the ones who are least likely to engage in and practice it. Yet financial literacy is typically marketed as something only poor people need.
I don't know about you, but I needed it the most when I started earning 6-figures because not being financially literate got me into a whole host of trouble!
But how do you know whether you're in need of some education? Well, here are the levels of financial stability people experience - where do you fall on the scale?
Financially Distressed: Being on the brink of homelessness, wondering where your next paycheck is coming from and not thinking beyond tomorrow. This could be a result of a job loss, sudden catastrophic illness or accident, or earning minimum wage and/or working less than 40 hours a week.
Financially Stressed: Living paycheck-to-paycheck constantly stressed out over whether you're going to overdraft your checking account and being in debt to the point where you can't cover the monthly minimum payments. Most likely you're practicing extreme frugality at this juncture because you have no other choice.
Financially Struggling: Middle-class Americans are experiencing this on a day-to-day basis. You have a steady income, yet are still living paycheck-to-paycheck. You might have a very small amount of savings set aside, but worry it's not enough if a real emergency strikes. And you're floating credit card, auto and mortgage debt, wondering which one will put you over the edge should you lose your income for even a short amount of time.
Financially Flexible: This is the state where most upper-middle-class Americans live. Being able to manage expenses, set aside some money for retirement and other financial goals like vacations or college funds, you have at least 3 months of expenses set aside in a rainy day fund and aren't in debt (other than your home). You feel pretty comfortable knowing you wouldn't face financial disaster if you were to lose a few paychecks.
Financially Secure: This is the holy grail of personal finance. This is where most people want to be, yet have no idea how to achieve. If you're at this level, you're maximizing retirement savings, your home is paid off, you're finding ways to make your money do more, you're able to give more, and you have multiple months or years of rainy day funds. Passive income is your best income.
Where do you think you stand currently? Please comment below and I'll respond!
All this being said, it's imperative we all become more financially literate because the financial state of your household and our country depends on it. It doesn't matter how much money you make, financial literacy is open to all, and has payoffs for everyone.
"Someone is sitting in the shade today because someone planted a tree a long time ago." ~ Warren Buffett
You can grow your money tree by starting the journey now! As the old adage goes: Don't put off until tomorrow what you can do today. Start now by taking a personal finance course, read a personal finance book, enroll in money coaching…
Whether you're looking to pay down debt, increase savings, learn why you make the money decisions you do so you can stop making the same mistakes, give more, do more, live more… taking control of your money is the only way to achieve your financial and life goals!
If you're thinking this is a good time to find out how you can get started, but don't have a clue how I've got an excellent resource for you! It's called the Fiscal Check-Up and after getting "examined", you'll know just where the holes in your financial plan are, and what you can do about it.
Your financial future is depending on you!
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