Why financial literacy matters – Twin Cities

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Bruce Helmer and Peg Webb

Financial literacy is knowing how to make smart decisions with your money. And sadly, too few Americans understand how to create a budget, manage a credit card, or save and invest for a major goals such as a first home or retirement. For example, a recent survey of adults showed that they could answer only 50% of 28 basic money questions in the 2022 TIAA Institute-GFLEC Personal Finance index.

The U.S. Financial Literacy and Education Commission has issued five building blocks of financial literacy (“My Money Five”) that everyone should master when making day-to-day decisions about their finances.

Earn. Your ability to earn a living over many decades is probably your biggest financial asset. Take the time to understand how your pay and benefits can become the backbone of your long-term financial plan. You should understand how various deductions and withholdings reduce your take-home pay in the form of federal, state and local income taxes, Social Security and Medicare taxes and payments for health insurance that may be offered by your employer. Be sure that you are taking advantage of employer’s matching contribution to your 401(k) account, as that could mean a faster and bigger payout when you retire. And remember to invest in your future with education and training opportunities inside and outside of work.

Save and invest. Everyone should have a future financial goal, such as buying a house or funding retirement to last through your expected lifetime. First, you need to have an account at a bank or credit union and pay yourself first by putting some money aside for your future before you write any other checks. (Automatic transfers are great for this purpose.)  Having a budget and tracking your spending can help you identify available dollars to save and invest, whether it’s in a tax-deferred retirement plan, in a tax-advantaged Roth IRA or in a taxable brokerage account. There are good reasons to spread your assets across each of these account types. And even saving a small amount initially can lead to a sizable nest egg, due to the power of compounded interest.

Protect. Life is full of unexpected surprises, such as a sudden job loss or death in the family. Often, these emergencies can be financially catastrophic. Make sure you are protected by accumulating an emergency savings fund of up to six months of nondiscretionary living expenses, and keep it in relatively safe, liquid funds. You can always transfer any excess emergency savings to your “long-term” investment account. Be sure to keep your financial records in order and be on the lookout for frauds and scams. If you have dependents, you need to be sure to have the right insurance in place (including health care coverage) in the event the unthinkable happens.

Spend. Before you make that next big purchase, take a breath. Is this item a “must-have” or a “nice-to-have”? Can you buy using cash (that is, living within your means), or will you be making interest payments for years to come? It’s always good to compare options and prices before you buy that shiny new object.

Borrow. Borrowing money is sometimes unavoidable, such as when buying a home or funding education expenses. Not all debt is bad — the important thing is knowing how to manage it, and not it let it balloon into an amount you cannot repay. Taking on modest levels of debt can help you grow wealth by maintaining liquidity and letting your investments grow. Borrowing makes sense if you can tie a purchase to improving your net wealth — learning a new employable skill, investing in a side business or building home equity are two examples.

If you are making investments or making decisions on other financial matters, it’s good to consult with a qualified professional. You should be aware that while many professionals call themselves “financial planners,” they may be more incentivized to sell you financial products rather than offer unbiased advice. Before you hire an adviser, ask for a description of the services offered and how they charge. You can also check out the credentials of any investment adviser by contacting your state’s consumer protection office, the state Attorney General’s Office, or the issuing agency of the licenses and certifications claimed by the adviser.

If you feel like you’re behind on this checklist, remember — you don’t have to do everything at once. Pick one or two financial literacy pillars and work on them one at a time. Soon you’ll develop confidence in your ability to manage your money so that it works more forcefully toward helping you achieve your lifelong goals.

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