How and Why you need to be Financially Literate

Financial literacy isn’t about knowing everything. It’s about knowing what will protect your money. I know, “the bank protects my money”. But it doesn’t. The bank takes your money, pays you lousy interest, and then lends your money to other people and charges them outrageous interest.

Being financially literate is more important than having a budget. It’s more important than living cheap, than having a savings plan.

Do you know what the fees of your checking account are, how much money you spend every month, how to buy stocks, how to calculate compounded interest? All of these things are critical to to making good decisions about your money. When you can make good decisions independently, you are financially literate.

Why is it important to understand money?

Everyone needs to make good financial decisions. You have to keep your banker/broker/agent honest, and the only way is to know a good deal from a bad one. Bad financial decisions cost normal people thousands of dollars. It’s better to make good decisions and knowingly spend hundreds on beer and cocktails, than make terrible decisions and have to cut out everything fun in your life. 

There are a lot of companies that pretend to help you make decent decisions. Please understand that banks exist to make money. Same with investment bankers, brokers, financial planners, accountants, real estate agents, credit card companies. Especially credit card companies. They don’t exist to help you. They exist to make money.

The good news is, some are better than others, you just have to make the right choices.

How to make good financial decisions?

Read this book: “I Will Teach you to be Rich”, by Ramit Sethi. I know, it sounds like the kitschy pyramid scheme, but it’s an excellent book on all that crap you need to know about dealing with money. It’s less than $10 on amazon. Or for the uber cheap, like me, check out your local library.

Here’s some ideas of what you need to know and do:

General

• How much money do you have?
• How much money do you owe? Student loans, mortgage, cars, ebay deals gone bad?
• Have you looked at your credit score?
• Have you looked at your credit reports (they are free once a year from annualcreditreport.com)
  • Reported anything that’s incorrect on your reports?
  • Taken actions to improve your score?

Budgeting

• How much money do you take home every month after taxes?
• How much money do you spend every month on average? On what?
  • How much do you spend on things you need (i.e. rent, utilities, food)
  • How much is “spending money”? Eating out, movies, clothes, gas, etc

Banking

• How much do you pay in bank fees?
  • For having an account?
  • For overdraft?
  • For ATM withdraws?
  • For a minimum balance?
• What is the interest rate on your bank account? Could you find a higher one? (bankrate.com)
• What’s the interest rate on your credit cards?
• Have you tried to get a lower rate lately?
• What fees do you pay on your credit cards? Annual? Late fees?
• What benefits come with your credit card? Rental insurance, Theft coverage, Travel insurance?
• Do you have a savings account? Does it suck? (see question 1 and 2)

Saving

• Do you know what you are saving for? How much it costs? And how much money you are going to save every month for it?
• Is your saving automated so you don’t actually have to do anything each month?

Long term investing

• Do you have a retirement account? If not, hang your head in shame.
• Do you know what a ROTH account is and why they are good?
• Are you contributing the full amount into your employers’ retirement plan? If you are self employed, do you have a solo-401K or a SEP or Simple account?
• What fees does you IRA account charge?
• What percent cut does your investment company take out of your earnings?
• How much money do you need to retire? Consider this question even if you are 20, it is important NOW.

When you know the answers to these questions, or at least, how to find them, you’re well on you way to being financially literate. Remember that these decisions aren’t to be passed off to an adviser. It’s your money, you need to decide how to save it and spend it.