Why Financial Literacy Is So Important

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[The following is a guest post on behalf of Advisor World on the topic of financial literacy.]

How Important Is Your Financial Literacy?

Making informed financial decisions can be difficult. You have monthly bills to pay, and you might wonder where the money is going to come from. Most Americans have no idea how to control their finances. Therefore, it helps to become educated on how to better manage your finances.

What is Financial Literacy?

In order for you to be financial literate, you need to know how to deal with credit (and take advantage of credit card benefits). You should be aware of the process of saving money, and you must know how to budget your finances. You need to have a plan for how you are spending your money.

April Is Financial Literacy Month

President Obama has announced that April is financial literacy month. Financial literacy is the capability to comprehend basic economic provisions and conceptions related to your family or business. The White House wants to help Americans better understand their personal finances, so they are trying to help citizens become financially literate.

Ways To Get Started In Becoming Financially Literate

  • Read: Find information in books, magazines, and newspapers. Become skilled in the world of finance.

  • Be willing to make changes: You must be flexible. You cannot expect to spend money frivolously.

  • Be patient: You cannot become financially literate overnight. It takes time to get a grip on your finances.

  • Take a class: There are investing and financial planning classes that are offered. Check in your community to see what financial classes that you can take.

  • Get advice from other people: If you know someone that seems very financial literate, ask for their advice.

  • Look for help online: There are many online forums where you can discuss financial decisions.

  • Quit making excuses: Don’t complain about not having enough money. In order to manage your money effectively, you need to change your attitude and be positive.

Study Your Paycheck

Your education and job have a huge impact on your income. Therefore, when receiving your paycheck, you should know the difference between your gross and net earnings. Be aware of what you are actually bringing home.

Plan A Budget

After realizing how much money you are actually making, then you should plan a budget. Keep your checkbook balanced, so you can keep track of your money. Know exactly what you are spending, and set your goals accordingly.

Loans

You should not get a loan or borrow money unless you know that you can pay it back. You should not charge unnecessary purchases on your credit card. Interest can really add up, so keep your credit card balances low.

Save Money For Emergencies

You need to also save money each month. Sometimes, you might encounter emergency expenses, and having extra money available will keep you from having to take out a loan or put it on your credit card. Your emergency fund should cover 3 to 6 months of living expenses.

Know Your Credit Score

It is a wise decision to know your credit score. You can get a free copy of your credit report annually. You can keep track of your credit, so you can make sure it is accurate and up to date.

Being financially literate can help you secure the financial future that you deserve. You should make good financial decisions so that you can use your money wisely.

Photo by Salvatore Vuono

Manage Your Finances Like a Monkey!

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So, Sandy @ First Gen American asked a bunch of finance writers to participate in a writing experiment. We have to write about a personal finance topic by using monkeys as the theme. I then began to think about one of my favorite facts about monkeys. The contrarian strategy which they employ to open a banana!

As you can see in the video below, monkeys open bananas from the opposite end than humans. Instead of fighting with the stem and having to involve a knife (or teeth), they just softly pinch the opposite end and then peel back.

Unfortunately, I couldn’t find a video of a monkey pinching a banana, so this human will have to do:

Someone taught me this a few years ago, and it has changed my life! Ok, that’s a bit of a stretch, but it has lowered my level of frustration when eating a banana. So, how does this relate to personal finance, you ask?

Using a Contrarian Strategy

In many walks of life (especially finance), going along with the popular way of doing things (or thinking) can be dangerous. In personal finance, it is always best to question every move to ensure that it makes sense for you.

Many financial decisions are made based on emotion and the herd mentality! We see many people performing a certain action, and we feel as though that is what everyone is supposed to do.

Just like the idea of peeling a banana from the stem, we end up wasting time and energy attacking a situation from the wrong end.

Be A Monkey When Finding A Place To Live

Take buying a house for example. Many people have become convinced that this is the right thing to do, simply because “everybody else does it”, or “it’s what you do when you become mature and stable”. People actually borrow money to gain shelter, borrow money to furnish it, then borrow more money to make expensive, unnecessary, cosmetic changes; and after all of this, they have the nerve to call it an “investment”!

However, we need to be like these monkeys and decide if that’s the best way to handle our need for shelter! Would it be better to be patient and take the path of least resistance? Rent a property until it makes financial sense to buy one!

Be A Monkey In School

Does it make sense to go into college directly after high school? For some, yes. However, this shouldn’t be an automatic decision that we make without proper analysis. Many high school graduates jump directly into college with no savings, no scholarship, and no support! But, since they have been told that this is the normal progression in life, they take on tens of thousands of dollars worth of student loans!

Much of the time, they have no idea what they want to study, or what they want to do with their lives. They just follow the herd and apply to college. Even the ones who have an idea about what they want to do, fail to count the costs of attending college with little to no savings! They just go and assume it will work itself out in the end.

However, we need to think back to the [mighty] monkey and attack this problem from a different angle. Before filling out those loan applications, do a little math to see how long you’ll be paying off those loans, and what benefit they will have.

You might find that it’s better to take a job directly out of high school (actually, while in high school), and save up for college – or even go to a 2-year school first – rather than being in bondage to student loan repayments for 10 or 20 years after graduation!

Use A Contrarian Strategy When Investing

Warren Buffett once stated that investors should “try to be fearful when others are greedy and greedy when others are fearful“. I’m definitely not suggesting that we go around following Buffett blindly, but he does make a good point. When people are chasing after a certain stock, commodity, or industry, that’s usually the time to run away (or short that investment)! Then once people are running away from those investments (after the irrational exuberance wears off), then that’s when you consider them as viable investments (paying attention to valuation, of course).

One contrarian strategy that has actually become quite popular as of late (possibly taking away part of its effectiveness) is to invest in gold coins and other precious metals. Gold is usually looked upon as a hedge against economic turmoil. For a long time, the most prominent method of investing in gold was through derivatives, therefore limiting the amount of people who were able to take meaningful positions. However, with the rise in gold mutual funds and ETFs, we are seeing more “everyday investors” getting in on the action.

Instead of just choosing what everyone else chooses (such as a 60/40 split, or saving 15% for retirement), look at your situation and make the choice that’s best for you! If you find it’s easier to peel the banana from the stub, while 95% of the investing world is still fighting with the stem, then ignore those who are “smarter” and move toward your goal!

 

photo by wwarby

Final Thoughts

Personal Finance is named that for a reason. In many cases, one-size-fits-all solutions do not exist. In those instances, it’s best to be a good monkey and look at the full picture. You may find that the answer lies at the other end of the peel!