If you want to learn about anything (how to cook fine meals, drive a car, practice yoga or raise a baby), you can probably find a good book or web page, or take a class to get a good basic overview of the topic in relatively short order. If you want to learn about money, however, the path to knowledge isn’t as clear, quick or easy. It’s a bit ironic too, considering that dealing with money is something we all need to do in some way or form. Becoming financially literate should certainly be one of the tasks on our “to do” list. Even if someone else takes care of the bills today, the harsh realities of life dictate that, at some point, you are likely to benefit from having a basic understanding of money and finance.
Even the language associated with finance and money sound complex to the point of intimidation. Stocks, bonds, mutual funds, hedge funds, derivatives, beta and the Sharpe ratio are just some examples. It’s a major disincentive that causes many people to give up before they even start. While it’s true that developing an advanced understanding of money and finance can take years of effort, getting the basics under control is easier than one might think. Start with a few simple guidelines and tasks. Once you have mastered those, let your interests guide your next steps. You don’t need to spend years learning formulas and memorizing complex terminology. So let’s get started!
Understand What You Spend
Nothing gets you in financial trouble faster than spending more than you earn. And nowhere is this a bigger problem than with women, according to a study published by the Financial Industry Regulatory Association (FINRA). The study, In Our Best Interest: Women, Financial Literacy and Credit Card Behavior, reveals that women are more likely to carry a credit card balance, pay late fees and make minimum payments on their debts than their male counterparts. Understanding your spending habits is a great place to start on your road to financial literacy. You can get started with a quick and easy 30-day plan. Best of all, there are no complex terms to memorize or fancy mathematical formulas and calculations required.
There are just three steps. Step 1: For one month, pay all of your bills with cash or a check. No credit cards allowed. Step 2: Save your receipts. This makes it easy to track what you have spent. Step 3: Do the math at the end of the month. This little exercise provides several valuable insights, including a good overview of your spending habits. You can tell how much money you spend in a month and what you spend that money on. From here, it’s easy to identity your recurring bills, so you can tell how much your cash outlay needs to be in a given month. You can also tell what percentage of your money goes for discretionary spending, such as dining out. The exercise makes it quite obvious if you usually spend more than you earn, because if you don’t use credit cards, at some point the money runs out.
In 30 days, you will have begun to take control of your finances. You’ll also become aware of your current debts – and all without complex language about debits, credits and balance sheets. It truly is a fast, easy and painless way to begin enhancing your financial literacy.
If you want to take this exercise to the next step, you can set up automatic payments to account for your recurring bills with just about every creditor from the mortgage company to the credit card company. By automatically debiting your bank account each month, you will never be late with any of your payments.
Pay Off Your Debts
Now that you are spending less than you earn, you can take your efforts to the next level. Your surplus cash can be used to pay down your debts. This financial strategy reduces the amount of money you will spend over your lifetime on interest payments to creditors. It’s also a good opportunity to spend a few minutes learning more about interest. You will become aware of how interest adds up over time, causing you to pay way more than face value for your purchases.
While we’re on the topic of interest and the power of compounding, it’s a two-way street. The same math that works for creditors also works for investors. Understanding the power of compounding and how it works provides insight into an important strategy that investors use to make money, and highlights why it is a strategy that you want to have working for you, not against you.
Start to Save
Once you are spending less that you earn, it’s time to save. Anything you save has the potential to grow. There are two basic types of savings: short term (emergency fund, upcoming expenses) and long term (investing for retirement). If you don’t know much about investing, that’s okay. There’s a simple way to start both your short-term and long-term savings plans. For short-term needs, open up an account at the local bank. There are no-fee, no-interest checking accounts for when you first start out, and then interest-bearing savings accounts when your balance is high enough. For your long-term needs, you can start by putting your money in a mutual fund that tracks the Standard and Poor’s 500 Index. It’s a simple, inexpensive way to dip your toe into the stock market, and since S&P activity is reported in the news every day, you will also have some sense of how your money is doing. You’ll generate investment returns that keep pace with the general stock market, as the S&P is a good gauge for measuring market behavior.
The Next Level
Sophisticated investors are quick to point out that saving at your local bank will never generate the type of investment returns that will make you rich, and that the S&P 500 is just one of the many thousands of possible investments in the market (not to mention bonds, commodities, real estate and a host of other money-making ventures). They are, of course, correct.
After you’ve dipped your toe in the water, you may want to develop a more sophisticated lens yourself by continuing to enhance your knowledge and understanding of investing. Learning about mutual funds is an easy way to do it. From there, you can expand into learning about stocks, bonds and more. Your strategy for doing so will be to take advantage of the many tools available to you, including newspapers, magazines, books, videos and websites. Your employer may offer educational seminars on topics like your company’s 401(k) plan, estate planning and saving for a child’s college education. Local community centers may also offer programs.
The Sky’s the Limit
A self-study program motivated by your specific interests will lead you down the path to increasingly complex ideas and investments. Formal programs and certifications are available; and of course, professional assistance is always available. Insurance companies, banks, brokerage firms and other entities all have financial services professionals who usually offer a free initial consultation. After speaking with several experts, you may even decide to hire one. If you do, the basic understanding that you have developed will help you understand expert advice.
The Bottom Line
The path to greater financial literacy begins by taking the first steps of knowing how much money is coming in, and doing your best to keep as much of it as possible for smart investments. From there, it is simply a matter of making an effort to research and learn about investing strategies that capture your attention. What are you waiting for? Get started today.