Why are so many adults stressed out by money? Partly it’s because money management is complex. Understanding the basics of budgeting, saving, and even compound interest rates are a good start. But financial literacy is not enough: financial capacity, financial well-being and financial resilience are also needed. Here’s how to get them.
Make financial education a family value
Money management was relatively straightforward. Before 2000, many companies were offering employee pensions, and there were fewer apps and financial options. When employers switched to 401 (k) plans, the financial planning burden passed to the employee. Combined with the onslaught of credit and debit cards, financial apps, loan options, and growing consumer debt, it’s no surprise that most adults are anxious about money management.
As the economic environment has changed, Americans have to challenge long-standing assumptions about personal finance. To begin with, make financial education an integral part of family values. Talk to your partner and children about money principles and best practices. You could ask your children to manage household expenses for the day or encourage a family member to look into an investment idea and explain the reasoning behind their decision.
Create a financial well-being checklist
Financial well-being is the ability to live comfortably today and still have the means to support oneself. Like physical health, financial well-being requires regular maintenance and checks to make sure you are on the right track. Here are the questions to ask:
- Am I saving enough money for emergencies?
- Am I spending more than what I earn?
- What is my credit score? How can I improve it?
- How Much Are My Retirement Savings Worth Today?
- Do I have disability protection if I am unable to work?
- Is my life insurance sufficient to provide for my family?
- Do I have a will and is it up to date?
A financial plan is not something you “set and forget”. It is always a good idea to do a financial wellbeing check when a change occurs that could affect your finances, such as getting married, having children, changing jobs, or receiving an inheritance. But you don’t need a big event to make sure you’re in good financial standing – reviewing your checklist every year can keep you on track and up to date with the current business environment.
Encourage and guide each other
Financial literacy is a skill that can help us make better money decisions. But the tools of financial growth and well-being are not equally available to everyone, making it difficult for friends, family or loved ones to prosper.
The gap between what we are taught and what we need to do to achieve financial well-being is even more evident when you consider that most people “don’t even know” that they don’t know how to manage their finances.
Families, friends, and communities should encourage and guide each other to improve financial literacy and well-being. Groups can:
- Share financial information and experiences.
- Help others better understand how to navigate the economy.
- Allow people with similar goals or interests to meet.
- Create a safe space to discuss potential solutions for personal financial growth.
Also, don’t discount hiring a financial professional – it’s not just for the rich. Many low- and middle-income people can also benefit from financial planning. If you choose a CERTIFIED FINANCIAL PLANNER ™ (CFP®) professional, they have a fiduciary duty to you. Many operate only for a fee, which means that the decisions they make must be in your best interest and not based on the commission they could earn.
Build financial resilience
Being financially literate does not make you immune to the economic system that surrounds us. A lot of financially literate people can have their finances negatively impacted by things beyond their control – this is where financial resilience comes into play.
Financial resilience is the ability to recover from unforeseen events, such as losing your job or being hit by a significant expense. It means that you have enough money in a savings account to handle emergencies and that you have access to the information and support you need when something goes wrong. Here are some things you can do to strengthen your financial resilience:
- Set financial goals. Make sure they’re realistic, but set them high enough to motivate you.
- Have a budget. Keep track of where your money goes and make sure you don’t spend too much in any area.
- Build an emergency fund. You want a rainy day fund that covers at least six months of living expenses.
- Pay off your debt. If you have high-interest debt, like credit cards or paycheck loans, pay it off quickly.
- Know where your money goes. It is easy to get caught up in daily expenses. But keeping an eye on where and how you’re spending can help you stay on track.
Although US adults generally understand basic financial concepts, many still find themselves in precarious financial situations. With 78% of US workers living from pay to pay, it’s clear that financial literacy is a problem.
Here’s the good news: A little financial planning can go a long way. By taking a few small actions now, you can set yourself on the path to being capable and resilient with your finances.
CEO, Blue Ocean Global Wealth
Marguerita M. Cheng is the CEO of Blue Ocean Global Wealth. She is a CFP® Professional, Certified Retirement Planning Consultant℠, Certified Retirement Income Professional, and Certified Divorce Financial Analyst. You help educate the public, policy makers and the media about the benefits of competent and ethical financial planning.