It Pays To Be Financially Literate. I Learned Why The Hard Way

If I’ve learned anything from my parents’ financial downfalls, it’s that you need to make informed decisions about money.

We lived well growing up. We were the typical Southern California family with a ranch in an expensive Los Angeles suburb with several (leased) cars and a boat.

That is, until my father lost his 20+ year job at a large public company. I was 11. We lost our home and moved to Oregon for cheaper housing. After about three years there, my father took a new job in Southern California and we were all ready to retire.

But then, after putting down a down payment on a house in California after he had already sold our house in Oregon, my father lost his (new) job. Long story short, we ended up spending over $20,000 on a summer trip while we were basically homeless. Spending on travel instead of saving triggered my family’s financial problems.

If you don’t understand personal finance, you’re more likely to experience financial stress. This is because you will constantly worry about money and whether you are making the right decisions with your finances.

Financial stress can affect your mental and physical health and even lead to relationship problems. In fact, one study showed that 70% of Americans who are married or cohabiting have had a disagreement with their partner about finances in the past year. It also showed that financial “infidelity” is enough to end about 40% of relationships.

My parents stayed together and are now enjoying life in Florida, but we need to rethink the way we talk about financial education. Most of us don’t learn about money until we get older, if at all. And often it’s because we’re forced into it (you’re buying a house) or you get into trouble (you’re behind on a car loan payment).

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We are not taught this in part because it is not required. Having early access to financial education in schools is a big step, but it’s only half the battle.

The other half takes responsibility for your education. There are real costs of not being financially literate. You don’t need to know everything, but understanding the basics of interest, investments, and taxes will help you build wealth over time.

Why is access to financial education so important?

Good financial decisions affect almost every area of ​​your life. They affect when you retire, the quality of education you receive, the foods you eat, your access to health care, and more.

If you don’t know anything about personal finance, you’re missing out on opportunities to save money. This doesn’t just mean putting cash into a savings account; it also means knowing how to invest in a 401(k) or how to use tax-advantaged accounts like IRAs. As a result, you could end up paying thousands of dollars more in taxes than you have to.

In today’s economy, many employers are looking for candidates who have a basic understanding of financial concepts. If you don’t have this knowledge, it can be difficult to find a job after graduation. My advice to students is not to ignore accounting or finance courses. In fact, I would encourage you to take electives that explore these issues in more depth.

If you’re unfamiliar with major financial issues, you’re also likely to be less prepared for unexpected expenses. On a small level, this could be something like a car breakdown. But the problem worsens the higher the stakes: what if you lose your job or get sick and need to take time off work, all the while sending medical bills skyrocketing? You may not have the savings or credit to cover these unexpected expenses. As a result, these unexpected financial events could leave you in debt or even bankrupt.

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So let’s look at some of the ways a basic understanding of personal finance can help you move forward.

avoid debt

One of the most important aspects of personal finance is learning how to manage debt. Credit cards, student loans, and other types of debt can be difficult to pay off if you don’t have a good understanding of interest rates and other financial concepts.

For example, a 1% difference in your mortgage rate can make a significant financial difference in both your payment and the total amount you’ve paid over time. Or you may decide that a $20,000 car is better for your future finances even if you qualify for a $40,000 auto loan.

Without a full understanding of your overall financial picture, that shiny new car might be too much to resist.

build wealth

Another important aspect of financial literacy is learning how to build wealth over time. If you don’t have a good understanding of financial concepts, it will be difficult to make wise decisions about saving for retirement or investing in a 529 college savings plan if you have children, for example.

However, by understanding high-yield savings accounts, how banks work, and what it means to own stocks, you can make informed decisions about how best to save for your (and your family’s) future.

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If you don’t save properly for your future, financial emergencies are likely to wreak havoc on your life.

Make smarter investments

If you don’t understand basic financial concepts, it can be difficult to make smart investment decisions.

Investing can be intimidating, which puts many people off from even getting started, but once you know the basics, it can be a lot more accessible.

I know from experience—both good and bad—that a single investment decision can change the outcome of your entire portfolio for years, if not forever. It sounds dramatic, but imagine investing all your money in Bitcoin for $61,000 and thinking it would grow to $200,000. As of this writing, it’s hovering around $19,000.

This is a dangerous game. However, once you’ve spent time understanding the markets (and now the unregulated markets) and how they work, you’ll be able to make informed decisions about which ones are right for you.

achieve financial goals

One of the most important concepts I learned in college was the time value of money.

It’s simple, but understanding how money can grow exponentially can dramatically change the way you make financial decisions if you have a long-term vision for the future.

Whether you’re looking to buy a home, take early retirement, or send your kids to college without student loans, leveraging financial literacy — through blogs, videos, podcasts, and courses, many of which are available online for free — will help you Develop an ironclad plan to reach your personal financial goals as early as possible.

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