Sometimes when people ask what I do for a living and I tell them that I’m a personal finance journalist, they react with a blank stare followed by, “I know nothing about personal finance.” To be honest, it doesn’t surprise me when I hear that. Nearly half the country is financially illiterate, according to Standard & Poor’s Rating Services 2015 Global Financial Literacy Survey.
Knowledge about personal finance certainly isn’t innate, and most schools don’t teach the subject. Just 17 states require high school students to take a course in personal finance, according to the Council for Economic Education’s 2016 Survey of States.
Personal finance isn’t always taught at home, either. The T.Rowe Price 2016 Parents, Kids & Money Survey found that 71 percent of parents are reluctant to talk to kids about financial matters, and less than half of the parents surveyed take advantage of opportunities throughout the day to teach their kids about money.
Money touches almost every aspect of modern life, so why do Americans struggle so much with understanding how to manage their finances? Despite efforts and initiatives such as National Financial Literacy Month every April, which raises awareness of financial education resources, Americans’ money savvy is still lagging ― and the problem has lasting consequences for everyone.
Why Most People Don’t Actively Manage Their Money
Some Americans might really be too busy to take the time to learn what isn’t being taught at school or at home. But others seem to just not care.
Michael Hardy, a certified financial planner with Mollot & Hardy in Amherst, N.Y., said he often encounters people who don’t seem to care about their personal finances. “They could be clients, prospects, family or friends,” he said. “In my experience, it seems the average person does not want to have to pay too much attention to their personal finances as they believe they will deal with it later, or it will all work itself out, or they will leave it to their spouse or the government to deal with.”
The truth is, though, no one can or should care more about your personal finances than you. And if you don’t take control of managing your money, your finances can control you. So you should care, and you should take the time to make your finances a priority.
How Caring About Your Finances Actually Saves You Money
When you take the time to understand the basics of personal finance and learn to manage your money wisely, you can actually improve your financial situation. “If you have money, you have a choice,” said Kimberly Foss, author of “Wealthy by Design” and founder and president of Empyrion Wealth Management.
Foss came from a humble background. She was the youngest of six children, her father was a carpenter, and her mother sold Avon products. “There was no money,” she said. And if the washing machine broke down, for example, they would wash clothes by hand and hang them out to dry because they had no other choice.
Her mother taught her an important lesson at a young age about money, however. When Foss wanted a pair of Jordache jeans that cost $38 ― this was in the 1960s, so that $38 would be more than $250 now ― her mother made her work for the jeans, paying her $1 an hour. Her mother also made her save an amount equal to the cost of the jeans. Foss said that being forced to save set a standard that she adhered to throughout her life.
Making the choice to save and to take control of your finances allows you to make other choices based on what you want rather than having those choices made for you because your financial situation limits what you can do. Caring about your personal finances gives you the freedom to do the things you want to do in life, Hardy said. When you understand how to manage your money and how to save money, you can:
- Reduce financial stress
- Eliminate debt
- Avoid living paycheck to paycheck
- Retire on your own terms
Making sure your finances are on track also allows you to support your family and help others who are in need, Foss and Hardy said. That’s a much better position to be in than having to seek financial support.
What Happens If You Don’t Care
Not knowing how to manage your money wisely or and not knowing where you stand financially can have several repercussions. “The far biggest repercussion for not caring is anxiety, stress and possible problems in your relationships,” Hardy said. “The No. 1 cause of divorce happens to be money-related issues.”
Stress results from not being able to pay bills because you haven’t learned to budget wisely or not having cash to cover an unexpected expense because you don’t have an emergency fund. It can come from not being able to get a loan you need because your credit is bad or having to declare bankruptcy because you accumulated too much debt.
I know it can be hard to find time in a busy schedule to even figure out how much cash you have coming in and going out each month, let alone come up with a comprehensive financial plan. But if you don’t think long term and make financial decisions with the future in mind, you will experience consequences. “Wake up and smell the coffee because, one day, you won’t have coffee,” Foss said.
How to Take Control of Your Finances
Taking control of your finances might seem overwhelming if you don’t know where to start. It’s OK to take baby steps, though, said Brad Sherman, investment advisor with Sherman Wealth Management in Gaithersburg, Md. Even taking one step is better than none, he said.
The hardest step might be being honest with yourself about where you are financially, Hardy said. But that is the most important thing you can do to improve your financial well-being. To do that, you’ll need to examine your finances closely. The following simple steps can help you understand how to budget and improve your financial situation.
1. Figure Out Where Your Money Is Going
To get a sense of where you stand financially, you need to track your income and expenses for a couple of months. “People need to be aware of where there money is going,” Foss said. Otherwise, you’ll end up spending all the money you make.
You can use a pencil and paper, a spreadsheet or personal finance software, or a budgeting app such as Mint, which can help track your spending for you. Choose the method that works best for you. Once you have an idea of how much money is coming in and going out each month, then you can take the next step to get your finances under control so that you’re living within your means and increasing your savings.
2. Write Down Your Goals
Figure out what you want to achieve financially in the short term, medium term and long term, Sherman said. Perhaps in the short term, you want to save enough money to take a trip. Perhaps your medium-term goal is to save enough for a down payment on a house. And maybe your long-term goal is to be able to retire at age 65 and travel the world.
“The goals can be whatever you want,” Sherman said. But the key is to write them down and to discuss them with your significant other so you’re on the same page, Sherman said. Having goals gives your money a purpose and helps you prioritize spending ― and putting them in writing can prompt you to make a plan to achieve them, he added.
3. Create a Roadmap to Achieve Your Goals
Once you know where your money is going and where you want it to go, you can take steps to align your spending with your priorities. In other words, you can create a plan to take full control of your money.
One way to plan is to use the 50/20/30 rule. Foss explained the components of this approach:
- 50 percent of your income goes to essentials ― housing, transportation, food, utilities and medical.
- 20 percent goes to debt reduction, savings and charitable contributions. If you have high-interest debt such as credit card debt, at least half of that 20 percent should go toward debt reduction, Foss said. If you don’t have debt, you can divide your savings into several accounts as designated “buckets” to help you reach your short-, medium- and long-term goals, Sherman added. Just make sure one of those accounts is an emergency fund with a goal of saving enough to cover six months’ worth of expenses.
- The remaining 30 percent can be used for flexible spending ― things you want but can live without, such as cable TV. If you want to boost savings or reduce your debt faster, this is spending that you can trim.
Sherman said that people often believe they can’t achieve their financial goals because haven’t taken time to create plan. Once they create a plan and break it down into small steps, though, they can be surprised by what they achieve.
“I have clients hit goals they never thought they would,” he said. “It’s motivating. Everyone likes crossing things off the list.”
4. Get Help From a Financial Advisor
You have to be the one to care about your finances. But that doesn’t mean you have manage them entirely on your own. Start reading more about budgeting or follow personal finance blogs to make managing your money less of a chore and more of a routine. These resources can help you know whether you need to consult a professional financial advisor, know what questions you should ask, and give you personal finance tips on the following:
- How to pay off debt
- How to save money on groceries and other necessities
- How to save money for a house
- How to save money for a car
- How to stick to a budget for the long term
Check to see if your employer offers any financial or investment advising services as part of your benefits. Or find a fee-only financial planner through the National Association of Personal Financial Advisors. If you just need to meet with a planner a few times to get on the right track, some planners charge by the hour, such as those in the Garrett Planning Network, a nationwide group of independent, fee-only financial planners.
Investing in your financial well-being can benefit your life in numerous ways. “Get a plan together,” Foss said. “That’s the best money you’ll ever spend.”