In past generations, financial literacy was simple. If you did not have the money in your pocket, you didn’t buy it. Credit, loans, and other financial products have all come about as consumer habits have changed. This means financial literacy has also changed.
Financial literacy is an understanding of your financial situation and the options available to you. This knowledge equips you to manage your current assets and income and to build a framework for future decisions. It is not just about the money you are spending; it is about the choices you are making every day, with a focus on the future.
While the level of financial education varies across education and income levels, evidence has shown that highly educated consumers with high incomes are not immune to financial illiteracy. We have worked with a couple who had an annual income of about $1million.
Most people would assume that family was very financially literate. However, despite this impressive income, the family’s net worth was not increasing, and their savings rates were unimpressive. It is not simply a matter of how much income you are bringing in, it is about how much money you are putting away. The focus cannot just be on growing your income but growing your net worth in the most efficient way (a combination of increasing assets and reducing liabilities). Simply put, it is about living below your means and investing the difference.
A good first step is taking an inventory of your financial situation and knowing where you are today, so you can connect the dots to where you want to go. Creating a household income statement, balance sheet, and budget, is a great first move. From there, identify the differences in your needs, wants, and wishes so you can prioritize and balance your current lifestyle with the future you want.
Your financial situation also includes your resources, net worth, insurance policies, etc. You should be able to conduct a cash flow analysis to understand your savings rate, contributions to retirement accounts and other investments, and your future potential for social security and pensions. On the investment side, financial literacy goes beyond knowing what you are invested in; it is also understanding the risk associated with your portfolio, the potential upside and downside, your rate of return, and income potential.
As you approach retirement, there will be even more factors to consider: navigating insurance and Medicare, establishing an income stream and portfolio withdrawal rates, understanding your Social Security options, and maximizing your tax situation. Major transitions are when all the work gets done; therefore, it is important to plan ahead, so the execution is seamless, you aren’t playing catch up, and you avoid major mistakes.
The good news is that you do not need to be an expert in all these areas. A basic understanding will give you the knowledge to speak with a trusted advisor to create a long-term plan and be your guiding light for important decisions.
At Pathfinder, we pride ourselves on providing that sense of security for our clients. Everyone needs to have a role in their financial life, but you do not have to walk the path alone. If you are ready to take the first step, give us a call at 910-793-0616. We are here to guide you forward.
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