April is Financial Literacy Month. Financial literacy is the ability to understand and manage personal finances effectively. It involves skills such as budgeting, saving, investing and making informed financial decisions. Strong financial literacy helps individuals achieve financial stability and long-term security.
While there are many aspects to financial literacy, many people think that the following are the core set:
- Budgeting – Tracking income and expenses to manage spending and savings. Budgeting can really relieve much of your financial stress because you know where your money is going which makes it much easier to redeploy it if necessary. Even without any historical data (which takes a bit to collect), there’s a decent rule of thumb to guide you. It’s the 50/30/20 rule. It merely suggests spending 50% of your after-tax income on life’s necessities, 30% on things that are more in the discretionary category and 20% on savings and debt reduction.
- Saving & Emergency Funds – Setting aside money for future needs and unexpected expenses. I’ve written that “It’s not what you make – it’s what you keep.” Savings drive the success of your emergency fund, retirement fund and other investments for future requirements. Your level of savings directly impacts your net worth and retirement success.
- Debt Management – The management of outstanding debts such as loans, mortgages and credit card balances. Some debt is necessary for most of us — such as when we buy a new home. However, debt should be minimized wherever possible. Here’s an article I wrote that tells you why.
- Investing – Allocating funds to various investment vehicles such as stocks, bonds, real estate and retirement accounts to grow wealth over time.
- Credit & Credit Scores – Learning how credit works and how to maintain a good credit score. A numerical representation of an individual’s creditworthiness, which impacts borrowing ability and interest rates on loans. A score over 750 is a good initial goal.
- Taxes – Understanding income taxes, deductions and tax-saving strategies. Naturally the goal here is to minimize taxes. One good starting point is to understand credits and deductions in order to reduce what you owe. You might want to check out one of my recent blogs that covers this information.
- Retirement Planning – Preparing for the future with 401(k)s, IRAs and other retirement plans. These savings will be needed when you stop working. While it’s never too late to start, it’s best to start while you’re young to let your investments grow over time. My favorite vehicle for retirement savings is a Roth IRA. A 401(k), especially if your employer provides matching funds, is also very important for long-term wealth building. There are also individual Traditional IRAs as well as regular taxable investments. We feel that it’s best to invest 15-20% of your net pay into this fund. Setting up automatic withdrawals for this is a great way to accumulate what you need for a comfortable retirement.
You can undoubtedly see that financial literacy is really important for achieving many of your goals in life. Whether your financial knowledge is pretty advanced or whether you’re just getting started, we’re available to review your particular situation in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.