This article was contributed by Marketing Director Katie Henderson.
In past generations, financial literacy was relatively simple. If you did not have the money in your pocket, you didn’t buy it. Purchasing on credit, extensive loans, and other financial products have all come about in more recent decades as consumer habits have changed. This means financial literacy has changed drastically as well.
True financial literacy goes beyond memorizing key terminology, understanding contribution limits, and account types. It includes a variety of practical skills and is as personal as your DNA.
Simply put, financial literacy is a solid understanding of your overall financial situation and the options available to you. This basic knowledge equips you with the information and skills to not only effectively manage your current assets and income, but to build a solid framework for future financial decisions and actions.
The first thing I learned about finance is that it is not just about the money you are spending, it is about the smart choices you are making every day and having a planning-forward focus.
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. Let me give you a real-life example: we have worked with a couple who, by all standards, would be considered wealthy, with an annual income of about $1million. Most people would assume that, based on that amount of income, the family was very financially literate. However, despite this impressive annual income, the family’s expenses exceeded over $1million per year. Their 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 (which is a combination of increasing assets and reducing liabilities). Simply put, it is about living below your means and investing the difference.
A solid first step to financial literacy is taking an inventory of your financial situation, getting to the root of where you are today, so you can connect the dots to where you want and need to go. Creating a household income statement, balance sheet, and budget, is a great first move. From there you can identify the differences in your needs, wants, and wishes so you can prioritize appropriately and balance your current lifestyle with the future you want.
Your financial situation includes not only your income and liabilities, but also your resources (such as real estate, vehicles, etc.), 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 decisions, establishing an income stream and appropriate withdrawal rates from your portfolio, understanding your options for Social Security, and maximizing your tax situation. Major transitions, such as retirement, are when all the work gets done; that is why it is important to plan ahead, so the execution is seamless, you aren’t left playing catch up, and you avoid major mistakes.
But 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 help you create a long-term plan and to 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. April is National Financial Literacy Month, and we cannot think of a better time to get started on the path to financial independence. If you are ready to take the first step, give us a call at 910-793-0616. We are here to guide you forward.
Jason is a wealth advisor and founding partner of Pathfinder Wealth Consulting. He has been in the financial services industry since 1999. Jason was born in Dayton, Ohio, but grew up in Eastern North Carolina. He graduated magna cum laude from the University of North Carolina Wilmington in 1999 with a BS in finance and an MBA in 2003. Rob Penn, Jason’s business partner, hired him in 1999 and the two began a successful business relationship, highlighted by the formation of Pathfinder Wealth Consulting in 2005. Jason’s passion for the business begins with helping our clients, working with select families to accomplish their personal and business goals. Jason’s role also includes managing the overall firm, leading its growth initiatives, and enhancing operations. Jason resides in Wilmington with his wife, Ashley, and their daughter, Merritt. Ashley is a speech-language pathologist and owns Therapy Connections, Inc., a pediatric speech therapy company. Currently, Jason spends most of his free time with his family doing anything kid-related. He also plays average golf as often as possible, waits patiently for his invitation to Jedi training, and hopes that maybe this year he'll have more time for surfing, boating, fishing, and all the water activities that the family loves. Jason considers himself a lifelong learner and is always ready to try a new activity, travel to a new spot, or delve into a new subject.
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