Finance has always been a major cause of stress for families. Everyone can relate; even the wealthiest people have felt financial pains at one time or another. Debt and/or a lack of savings can cause considerable hardship on a person’s life. And it doesn’t just cause daily stress. Financial problems can lead to divorce, poor health, depression and bankruptcy.
Now, with COVID throwing the world into a state of flux, these stresses have been amplified. Millions of Americans have lost their income, and those who haven’t are worried they might be next. If this catastrophe has shown us anything, it’s that the need for financial education and literacy has never been more critical. Just look at these facts:
Nearly half of Americans don’t have enough cash available to cover a $400 emergency.
Getting fired or having a medical emergency without any savings would be devastating. Understanding the importance of an emergency fund could prevent this.
Millennials are starting their careers with a combined $1.52 trillion in debt.
Students coming out of college have more crippling student loans than ever. They are spending years trying to pay them off, which means they are saving less than they could. Being taught about debt, the different ways to pay for colleges, and the importance of not borrowing more than you can afford could help to prevent these massive numbers.
38% of U.S. households already had credit card debt before March 2020.
On average, they owed $16,048 with an APR of 16.47%. Taking into account the lack of savings and now lost income, those numbers are sure to rise. While some debt, like mortgages or student loans, can be considered “good” debt, credit cards are most definitely not. Learning the dangers of credit cards and high interest rates are critical, as well as the importance of paying them off.
Considering the fact that most will need at least $1 million to retire (for 30 years of living), a lack of savings is a major problem. The most important rule in saving for retirement is to start early. However, people seldom do, unfortunately, because they weren’t taught the importance of compound interest and time.
Being financially literate is connected to wealth.
A study conducted by financial services company TIAA-CREF found a direct correlation between financial literacy and wealth. It showed that those with high financial literacy planned for retirement and have double the wealth of those people who do not plan for retirement. Those with low financial literacy borrow more, have less wealth, and end up paying unnecessary fees for financial products.
Finance can be intimidating, but you don’t have to be a sophisticated investor to understand enough to be financially healthy. Being financially healthy means you know the difference between good and bad debt, and know how to avoid crushing credit card debt. You understand the importance of saving often so you can feel secure in your future. It also means that no matter your stage of life or income, you know how to live within your means, stick to a budget and spend responsibly.
The first and easiest step to becoming financially literate is to step back and take a look at your own financial world. Start with your budget. Remember, a budget is not meant to be a form of torture – it’s simply a record of how much you make, versus how much you spend. Look at the past three months of spending, and categorize your expenses into fixed and discretionary. Fixed are things like mortgage, car payments and phone bills. Discretionary is travel, entertainment and clothing. The goal of any budget exercise is to ensure you are making more than you are spending. If you’re not, start cutting down the discretionary expenses.
The next step is to address any credit card debt you may have, and create a payment plan to get the balance down as quickly as possible. If you have high interest credit cards, consider transferring them to a lower one.
Once you are on track with your budget and debt, create a savings plan. There really is no ‘wrong’ way to save. If you don’t have an emergency fund, I recommend starting with that. Your ultimate goal is to have at least three months of income saved – but start with saving $500. That will get you through if a house, car or medical expense strikes. And give you a little needed peace of mind. Once you have a comfortable safety net, start putting away into a retirement account, like your company’s 401k or an IRA. Even if it’s just $25 / month — start with whatever you can. The most important part is to start.
COVID-19 has painfully shown us how important it is to have these basic personal financial skills. Your level of understanding around these fundamentals impact every part of your life, and can mean the difference between prosperity and poverty. Especially when disaster strikes.
Liz Frazier is the Executive Director of Financial Education at Copper and author of “Beyond Piggy Banks and Lemonade Stands: How To Teach Young Kids About Finance”. Liz is a Certified Financial Planner specializing in financial planning for families and working professionals. Her goal is to alleviate the anxiety that surrounds finance, and make financial education, resources and tools accessible to all.