Top Ten Measures of Your Own Financial Literacy
The economic uncertainty over the last few years has many people searching for ways to ensure they are financially sound. It has also highlighted the fact that financial literacy is essential for the success of our children! But how can we be sure that they (or even we) are financially literate?
According to Wikipedia, financial literacy refers to the set of skills and knowledge that allows an individual to make informed and effective personal financial decisions. But what does that really mean, and how do we make sure our kids learn in time?
A recent survey found that almost fifty percent of those who closely monitor their finances say that they learned about personal finance from their parents at home, so most experts agree that the role of parenting is key. But many times, parents do not feel they are the best resource for financial education either because of their own financial status or because their children are not likely to listen.
I have dedicated my life to creating resources and tools that empower parents and kids to get the financial education they need and want. Below are ten top financial tasks that most people have to deal with throughout their lifetime. “Rules of thumb” are offered, where possible, for pragmatic advice on what might be considered good practices in each area. You may have seen or heard some of these before. It is often the simplest tasks that can make the biggest impact!
- Balance your check book monthly. According to a recent poll, 69% of people never balance their check book, but it’s not known how many of these simply don’t know how. Three good reasons for doing it include verifying your records against the bank, finding bank mistakes, and correcting your own oversights.
- Handle home buying and mortgage alternatives. Buying a home is a major transaction, with severe financial implications based on the type of mortgage you choose, monthly payments, payoff period, and initial down payment. If you are spending more than 30% of your gross income on the mortgage, you may be in financial jeopardy.
- Balance a home budget and pay normal bills on time. A simple home budget is a comparison of monthly income to monthly expenses, to make sure you are living within your means. If you don’t know these numbers, it’s highly likely that the urge to spend will exceed your income, leading to financial hardship and long-term unhappiness.
- Set up and manage a savings account for a rainy day. Unfortunately, not all expenses can be predicted, including emergencies, one-time purchases, and unexpected income losses. Experts recommend that you plan to put 10% of your net income into a bank savings account for those unforeseen requirements, or an amount that would cover 3 to 6 months of your living expenses.
- Establish credit and manage credit card payments. Establishing a good credit record means simply paying all bills on time. If your credit record is bad, you won’t be able to borrow money you need for your next car, mortgage, or major purchase. Good practice is never having more than two credit cards, and always paying the balance each month. In addition, it is good practice to keep your monthly debt payments to below 36% of your monthly income.
- Determine insurance requirements for auto, home, and health. Buying insurance is paying a small amount each month to protect you from large outlays for accidents, natural disasters, and high health costs. Avoiding the s small amounts today and praying you never have big ones, can be financially catastrophic.
- Save for your kids college education costs. The costs to educate your children, even pre-college, are going up each year. The time to start saving for these costs is when each child is born. Learn the tax implications and growth implications of the many alternatives available, including special bank savings accounts and 529 Plan accounts.
- Build a retirement fund for your own future. It’s inevitable that your earning power will decline over time, and your health costs will go up. The time to start saving for retirement is when you get your first job. Options are numerous, including IRAs, 401(K)s, and special savings accounts. Your target should be 15% of your net income while working.
- Pay income and property taxes. Part of financial literacy is anticipating your tax burdens. These can usually be withheld from your wages, or included in your monthly mortgage payments, so they need not be a surprise. As a general rule, you should expect that about 30% of your gross income will go to taxes, so budget for it.
- Manage simple investments for income growth. Your savings are investments in the future, but bank savings accounts offer very low growth potential. Financially literate people will leverage this growth potential, and balance the risk, with a portion of their savings, through smart investments in property, stock, bonds, and other assets.
In a practical sense, anyone and everyone in your family who feels they understand and could have written eight or more of the definitions above is financially literate. According to a 2009 Harris Poll, that would put you in the top 20% of the US population.
If, on the other hand, half or more of these are new to you, then it’s time for additional financial education. Maybe it’s time for an evening course at your local college, some dedicated learning time on the Internet, or professional help. Alternatively, it may just take more determination and work to practice what you already know.
As importantly, in your role as a parent, every one of your kids needs to take the same financial literacy test while they are still at home and before they graduate high school. Advocating for our children includes ensuring they learn the skills necessary for a successful life. Money is just as much a life skill as reading and writing. Not addressing the issues will jeopardize their future and yours as well. This doesn’t have to mean another lecture from a mom or dad. Check out learning tools and resources for fun and engaging ways that your children can learn.
Some financial education and coaching programs can be very expensive, which is why I created the financial education and coaching site www.financialmentorship.com. For less than the cost of going out to lunch each month you can access financial education resources for you and your family. I invite you to join me at this site where I will be sharing important financial strategies and information from my financial experts and masterminds in a fun and social online environment where you can connect with others who are taking control of their finances.
Remember that financial literacy is a term that covers both “knowing” what to do, and actually “practicing” it. Thus knowing what to do is necessary, but not sufficient for success. Where are you and your family along the spectrum? Your long-term happiness and theirs depends on it.
To Your Success!