Financial Literacy Roadmap

The financial industry is the biggest in the world, at over $109 trillion. Financial literacy leads to greater prosperity and confidence in being prepared for retirement in a way that delivers on our dreams and goals. 72% of households do not have a written financial plan, and most people have never been educated about how money works. They save money at the bank, earning a low or no interest rate that does not even keep up with inflation, essentially losing money. Those who plan usually do it themselves, resulting in a lower rate of return.

To navigate a secure financial future, students benefit from models and practice in becoming financially literate. There are many things to consider when developing financial literacy: Cash Flow, Emergency Funds, Debt Management, Protection Plans, Building Wealth, and Preserving Wealth.

Cash Flow

Aspiring to accomplish dreams demands an attainment of a level of income that will deliver the means for their realization. Cash flow can be both earned and unearned. Simply put, it is the money coming in each month to pay bills, fund savings, and buy things that are needed and wanted for daily living. This income can be a fixed delivery—a steady amount regularly—or it can be variable based on many factors, such as rates of pay, frequency of work, length of work expended, or stability of work available.

Cash flow can come in three different forms: linear, passive, and residual. When income is paid in the form of a salary payment, it is considered to be linear since it is a constant amount paid on a consistent, regularly cadenced schedule. Some forms of income are considered passive or generated with minimal ongoing effort, usually through an investment of time or capital. Residual income is the recurring payments that occur after costs have been paid, such as ongoing commissions. 

Emergency Funds

Life happens. Situations arise in our daily lives that are often unplanned. Job interruptions resulting from company restructuring or downsizing impact families’ livelihoods. Emergency health incidents can require immediate, pricey expenditures. Automobiles may need repair and are likely a means to provide transportation for earning income at a job or business. Unexpected repairs or maintenance to our homes can deplete savings that may be needed for other unplanned issues. Maintaining savings funds that cover at least three to six months of expenses can reduce stress and financial hardship in situations when cash needs to be readily available. Unfortunately, 34% of Americans live paycheck to paycheck with no money in savings.

Debt Management

Personally tailored budgets help to manage cash flow against expenses. If more is spent than what is coming in through cash flow, debt begins to build. Eventually, there is a tipping point that provides no way out of ruining credit, which leads to loss of assets and an overall negative impact on financial freedom.

Debt can be considered good debt or bad debt. Investment in education, learning skills or trades, or starting a business that leads to greater earning potential can be considered good debt if the amount of debt incurred will be subsumed by earnings that provide the means to pay off the debt without incurring so much interest over time that the return on the investment is not actualized. If the debt does not lead to a path to earning income beyond that investment, it would not be considered good debt.

The use of credit cards that are paid off monthly will build greater credit ratings and make it easier for someone to borrow money through loans and mortgages, etc., with lower interest rates and better terms thus resulting in greater savings or lending capabilities. However, using credit cards and generating balances that are not paid off monthly can result in a pile of debt that is difficult to recover from and can ultimately damage or lower credit scores if too much revolving credit is extended. Interest rates can rise beyond control.

Protection Plans

Protection plans are the foundation that keeps all your money afloat and not used for other things. Many of us think that we have plenty of time to protect our families and that insurance is a waste of money or not a sound investment. Different protection vehicles can offer a security net for our families in the event the unthinkable happens. Automobiles and houses are insured. Personal belongings and pets are insured. The best way to make sure your loved ones are protected and can continue the same level of livelihood is to have plans that meet the dreams and aspirations you have as a family. Taking the time to explore the many options available can ensure the best fit on the path to your goals.

Building Wealth with Three Money Buckets: Short, Mid, Long-Term

Exploring your risk comfort levels, considering the security of the investments you make, and understanding the need for a diverse, strategic plan can lead to generational wealth. The retirement future you dream of can be met or exceeded and confidence that your money is working hard for you can be developed.

Three main buckets of money support a healthy financial future. Long-term investments, like real estate or 401Ks, are meant to make your money work for you to generate retirement wealth and outpace inflation. Mid-term investments, such as annuities, may provide some safety tax deferred options for significant growth that may support a house down payment or starting a business. Short-term investments are highly liquid and low-risk holding money for three years or less, such as CDs that can produce quick access and preserve capital.

Preserving Wealth

Wills and trusts are often overlooked, misunderstood, and neglected. Once you work hard for the wealth you build, no matter how large or small, an executed will identifies what you wish to do with it and who will benefit from it. Trusts make sure the will is executed as planned without probate court fees and decisions being made on your behalf. Lengthy court proceedings can delay closing out estates and drain funds from what should be in the hands of the ones you designate as benefactors.

Establishing a Power of Attorney to authorize someone trusted to act on a person’s behalf regarding financial or legal matters can ensure that wise decisions are made with generational wealth if loved ones can no longer make sound decisions. Designating who will have that responsibility in advance of needing those services can provide for smoother transitions in making sure loved ones are taken care of as they age and their wealth passes to those intended to receive it at their passing.

Conclusion

Education about finances is key to having a GPS to the future you want to live. Financial literacy is vital to financial health and freedom.