Financial Literacy | Educated Planning Versus Making-Do or Squeaking-By
How many people really understand financial literacy, or are sure what it is? I admit to being rather ignorant. For most of my life, financial literacy comprised getting the highest-paying job I could, paying my bills, and saving for retirement in my 401K (the minimal amount). However, recently I had a reason to really see my faulty ideas on money management.
I learned there are “four walls” that make up the foundation of a sound budget: food, utilities, shelter, and transportation. First, income goes toward essentials, then luxuries can come if your budget allows. Many, many people equate essential to what they desire, not need. They just put it on the credit card. Then the credit card becomes due and something else has come up that needs those funds. Ad infinitum.
Utilities include electricity, water, trash services, phone bills, and sometimes natural gas or propane, depending on where you live. Since utility bills usually differ per month, always allow the figure to be on the higher side. Many utilities allow customers to pay a monthly average of an entire year’s expenses, so the money is more dispersed.
Shelter includes your rent or mortgage plus insurance, property taxes, and other fees associated directly with owning or renting. Shelter should be no higher than 25% of your take-home pay.
Transportation can include gas, public transportation, and routine maintenance.
Finally, adopt the 75-15-10 rule. This method involves allocating 75% of your earnings for spending, 15% for investing, and 10% for saving. Prioritize building wealth through investments rather than relying on savings.
Reputable companies now offer apps that allow 13-17-year-olds, with parental supervision, to learn financial responsibility. From a teen’s $20/week newspaper route, the teen could use $15 of the income and pay for expenses they have, $15 could be invested in mutual funds, stocks, or ETFs. Then, they could put the remaining $5 into a savings account with interest.