We can all remember learning our ABCs and 123s and lots of school lessons that got us started on the path to navigating this big, beautiful world. A lot of other stuff (like learning not to touch a hot stove) we had to learn the hard way. If you’re anything like my clients, money knowledge falls somewhere in between a little bit of information and a whole lot of accidents. If you never got a proper education in personal finances, you’re not alone—I know very few people who did. Most of us learned about money through the school of hard knocks. Financial literacy is beginning to pop up in grade school curriculum around the country. My 14-year-old son just had a mini class about personal finance in 8th grade – I was stoked! For most of us over 20, we weren’t so lucky. If you are ready to finally start taking control of your finances, let’s start with the basics.
Learning the basics of money management skills
Having greater financial awareness supports us in making better financial decisions. If you feel insecure in this category, don’t feel ashamed—it’s a pretty common problem. In fact, a national study found that “Americans demonstrate relatively low levels of financial literacy and have difficulty applying financial decision-making skills to real-life situations.” When they asked participants from around the country five basic personal finance questions, over 66% could not get more than three questions right.
Knowledge is power. You will feel far more confident in your money decisions with knowledge and practice. This is the work that I do daily with my clients—it’s simple, and makes a big difference. Here’s a breakdown of the main components of financial literacy that create the foundation for a healthier financial future.
Step 1: Know the Basics
Do you know the difference between your income and net worth? Many people don’t. Before I became a financial advisor, I barely knew the difference between gross and net income. Same with you? I honestly felt like learning money was like learning Italian. There is a lot of industry jargon baked into money. Start by learning the key financial literacy terms and what they mean so you can make more informed decisions when dealing with your money. Here are a few key financial terms to remember moving forward:
Assets: A resource or item owned by a person or entity that has financial value or is expected to have financial value in the future.
Cash-flow: The movement of a person’s, household’s, or business’s money—coming in as income and going out as expenses.
Credit Score: The three-digit score assigned to your credit profile based on your debt history. A high credit score demonstrates your trustworthiness to lenders, indicating that you are likely to repay your debts. A higher score often results in approval for loans with lower interest rates.
Expenses: The cost required, or money that needs to be spent on something. Common expenses include rent, mortgage, insurance, food, clothes, repairs, business services, etc.
Gross Income: The total amount of income you earn—both wages and any other income—before taxes, insurance, and retirement contributions are taken out.
Net Income: The total income you end up with after all deductions, such as taxes and retirement, are taken out.
Net Worth: The sum total of assets minus your expenses and debts.
Stocks: A type of investment that, when purchased, gives you partial ownership of a public company. Also known as a share or equities.
Step 2: Create a spending plan
You could call this a “budget,” but I hate budgets. They are restricting and, just like diets, they never worked for me. Instead, start by tracking your money and putting some goals in place. And a spending plan won’t magically form on its own. You need to track your money for a bit of time (I recommend 90 days) before you start to identify behaviors and patterns. Spending plans create defined lines that keep you aware of your incoming and outgoing money, so that you’re in control rather than the other way around. To do this, start by listing out all of your monthly expenses and earnings—i.e. tracking. It might take a whole lot of courage to face these numbers all at once, especially if money is a struggle right now. I promise, it will get easier over time. And, reach out to me and my team for some backup.
Step 3: Set up your savings
Saving money may seem like a pipe dream when expenses come flying your way faster than you can handle, especially in today’s world. Having savings will make future dreams and future emergencies that much easier to handle. There are different types of savings, not just retirement money that you can’t touch for years. I have my clients save according to different life goals and timelines. Here are some examples:
– Money toward your future, such as 401K, IRA, or other investments
– Saving to spend, like vacations, cars, and other fun stuff
– Emergency funds, like unexpected medical expenses, sudden car and home repairs
Step 4: Protect yourself from identity theft and fraud
Nearly 18 million Americans experience identity theft each year, with a combined average loss of more than $1,300 per victim. The reality is that it is your responsibility to protect yourself from scams, phishing attempts, and straight-up identity theft. Essential steps that you can take to safeguard your money:
- Check your bank accounts on a very regular basis. Whether that’s daily or weekly is up to you, but staying on top of your balance is a critical step to catching any suspicious activity.
- Review your credit report at LEAST twice a year to make sure you recognize everything on it.
- Change passwords on a regular basis. It may seem annoying, but it’s an important and inconvenient step that will save you a lot of trouble down the line.
You can always get started.
Even if you feel like a total beginner, the best time to learn more about financial literacy is right now. The more you know, the savvier you’ll be when it comes to navigating money decisions. There’s so much power in that!
There’s no shame in this game. Gaining a few financial literacy skills is a great way to get control over your financial future and help you create the life you actually want. Taking the fear or anxiety out of the process is what I’m here for. If you’re looking for a supportive group of women to help you achieve your money goals this year, join mine. If you are looking for help getting your $hit together or learning how to invest your money going forward, sign up for my next GIT Elevated Money Course today!