A Financial Literacy Handbook for All Life Stages
Whether you’re a high school student, college grad, new homeowner, or middle-aged career worker, smart financial decisions are a must. Establishing financial habits that will help you save, spend, and invest more wisely need not be intimidating. Anyone can become more financially literate! No matter where you are in your life, you can master any goal, whether it’s reducing your spending, saving to buy a home, or working toward funding your child’s education or your own retirement.
This guide will:
Show what you can expect to spend money on based on your age
Provide you with strategies for managing your money
Teach you the basics of navigating life’s major expenses
The Ground Rules: Basic Money Principles
Save by Paying Yourself First
It can feel almost impossible to save money when expenses keep piling up. To solve this dilemma, many financial experts recommend that you think of your savings account as your most important bill. At every paycheck, take a certain amount (either flat or percentage) of it off the top and transfer it to your savings account. Even better, if you get paid regularly by direct deposit, set up an automated transfer to that account so that you don’t even see the money before it goes into savings. Pay your living expenses and other bills out of your remaining money.
Your initial savings goal should ideally cover about six months of living expenses. This will protect you in the case of a sudden emergency or unexpected job loss. After that goal has been met, set your sights on long-term goals like college tuition for your children and an ample retirement fund for yourself.
Make a Budget
Having a budget is crucial if you want to know exactly where your money is going and why. Spending with intention instead of haphazardly will help you track your expenses on a daily, weekly, and monthly basis, so that you can adjust your spending habits as necessary.
Track Your Spending
Start a spending diary to keep track of those small, everyday expenses or fees that drain your bank account without you noticing. Having a visible, written record can also help you anticipate fixed expenses such as rent or car payments, or variable charges such as utility bills.
Get Rid of Debt
Try to pay off your highest-interest loans first, but don’t fall behind on any of your obligations. Whether it is car loans, credit card bills, or college debt, keep all of your accounts in good standing to avoid black marks on your credit history or a flagging credit score.
Though you want to eliminate all your debts as soon as possible, not all debt is inherently bad, or even unwise. You may have heard the term “good debt”, which refers to any debt that you take on in order to improve your position later—such as going to college so that you can increase your skill level and gain a higher income. But for the purposes of good money management, you should treat all your debts as obligations to be fulfilled by full repayment as soon as you are able to do so.
Managing Your Money at Any Age
Financial Literacy in Your Teens
The most important thing for young adults to learn is the ability to distinguish between wants and needs. Do you really need that pair of expensive designer jeans, or do you just want them because you saw a celebrity in them? You can still buy some luxury items that you want, but you need to understand the impact of expensive splurging—an impulse buy now could mean not having the money to buy gas or textbooks later.
Though a person typically isn’t eligible for a credit card until the age of 21, you can be added as an authorized user to an account belonging to one of your parents. This helps build your credit history to your ultimate goal of “excellent,” which is anything above 720. Credit card companies, lenders, and insurance companies, among others, use your credit score to determine your responsible you are with money.
If your parents do add you as an authorized user to one of their accounts, you’ll need to discuss when you can use the card and whether you’ll be responsible for paying some or all of the bill. You also need to be aware of the spending limit on the card and realize that if you max out the card, it will be declined and you may be charged substantial fees.
Assuming that you don’t qualify for a credit card, you may opt for a debit card instead. Unlike a credit card, which creates a separate bill to pay each month, a debit card pulls money directly from your checking account. Keep in mind, however, that consumer protections that are extended to credit card purchases aren’t necessarily offered on debit ones, so be sure to ask about warranty and return policies.
Getting a part-time job can be a great way to earn money and develop skills for your future career. It depends on how much you earn, but you may be required to file an income tax return—both with your state and with the Internal Revenue Service
This shows you the number of hours you worked, your pay per hour, and the total wages you earned in that pay period. Gross income refers to the amount you earned before taxes, while net income is the amount the government leaves you after taxes. Your paycheck may also list your year-to-date (YTD) pay, which is the total amount you’ve earned with that employer since the beginning of the calendar year.
Typically, you employer will withhold the amount of money required for state and federal income tax and FICA contributions. FICA applies to both Social Security and Medicare taxes; your employer pays half of what you owe, and the other half comes from your paycheck.
Though none are included on this sample paycheck, if you have any qualifying reimbursement expenses for your job, such as uniforms, travel, or the like, those would be listed here, too.
Financial Literacy in Your 20s
By this time, you should be getting close to becoming financially independent. Making your own decisions regarding how to manage your money can be scary and exhilarating at the same time.
First, create a budget. You want to make sure that you aren’t overspending, so track your expenses on a weekly or monthly basis. You can use a pen and paper, a spreadsheet, or a smartphone app—so long as you can see where your money is going. Once you lay it all out and see exactly what you’re spending, you may be inspired to become frugal in simple ways, such as packing your own lunch for work instead of ordering out.
Your budget will cover necessities such as rent, car payments, and food, and pleasure items like weekend travel or movie tickets, but it should also account for more complex savings goals. Short-term planning for a major purchase like buying a car, mid-term plans such as a down payment on a house, and long-term goals like retirement should always be included in your budget, as well.
Once you land your first job, be sure to participate in your employer’s retirement savings plan. Though your retirement may seem far off, it’s never too soon to start thinking about your future. Some employers offer matching funds when you contribute to the offered 401(k) plan. This employer match is free money to you, and adds to your compounded interest, which is interest on interest that you’ve already earned. Compound interest becomes very powerful with the addition of time, and that’s why it’s so important to get an early start. As a younger investor, it’s the quickest way to build up your nest egg.
As a responsible adult, it’s time to think about shopping for your own health insurance. If you’re under 26, you may still be eligible for coverage under your parents’ plan. But if not, look at your available plan options, such as that offered by your employer or your state’s health insurance provider. If coverage is required by law come tax time, being uninsured could result in penalizing taxes or large hospital bills if you become ill or get injured.
The Breakdown: Buying a Car on Credit
If you need a car right now, but can’t afford to buy it outright, you’ll need to obtain a car loan. This will allow you to spread the cost of the vehicle over a longer period of time—the longer the loan period, the lower the payment will be. However, if your loan term lasts too long, you may owe more on the vehicle than it is worth (known as being underwater) for a significant portion of the loan period. However, by the time you finish your payments, you will own the vehicle 100%.
If you are going to finance a vehicle purchase, get pre-approval from your bank or credit union before going to a dealership. Having your own financing available could help you negotiate a lower dealer-financed interest rate. Sometimes, a dealership will offer free upgrades or substantial discounts on the purchase price, but you’ll have to use the dealer financing in order to get these deals. If the incentives are worth the trouble, go ahead and accept dealer financing in order to take advantage of the deals. Then in the next month, refinance for a lower interest rate with your own bank or credit union.
One alternative to buying a car is to lease one. Like rent, you pay a certain amount of money each month for the right to use the vehicle. This use typically comes with a mileage surcharge if you exceed 12,00 miles per year (or 1,000 miles per month), along with damage fees if you subject the car to excessive wear.
Leasing can be a good choice if you don’t have enough money for a down payment, or simply don’t want to get into a loan at this time. The one big drawback to leasing is that instead of investing capital into a vehicle that will ultimately become yours, a leased vehicle goes back to the company at the end of the term and you’re left without a car again.
Financial Literacy in Your 30s
Now that you’re in your 30s, you may take on even more responsibility, whether it’s because you’re earning more, paying a mortgage, joining finances with a life partner, or any combination of the above.
If you are going to be living with a partner, think carefully about your financial goals and your spending preferences, because your partner’s ideas might be very different. Knowing your goals and expectations is the first step in the mutual discussion you’ll need to have to help align your goals. Start by making a joint list of any shared responsibilities such as rent, a mortgage, car insurance, or pet care. Then, create separate lists with the categories on which you each like to spend your remaining money, in order of priority. Here is an example list of suggested priorities:
Experiences (travel, concerts, cooking classes, dinners out)
Material Things (for home, cars, clothing, etc)
Family (higher education fund for kids, family get-togethers)
Savings (emergency, retirement, and other goals)
Everyday Luxuries (beauty/barber, vintage wine, brand-new electronics, etc)
Talk about joining accounts
Having a joint bank account gives couples equal access to funds. This enables both parties to see how much money is being withdrawn and where it is going. Communication and trust are essential for this kind of arrangement to work. Make sure both of you discuss your financial priorities before going this route.
…But know it’s not the only option
Some couples use a combined approach: a joint account for shared expenses, as well as each partner, maintaining a personal account to retain some financial autonomy. This arrangement may be particularly appealing to people already well accustomed to handling their own finances. On the other hand, having three bank accounts instead of one can make it harder to track spending, identify problems, and work on a plan for improvement.
Before you merge finances as a couple, make sure that you discuss how shared expenses will be managed. Will you both contribute equally, or in proportion to your incomes? Settling this, in the beginning, will help each partner feel that their contributions are both worthwhile and fair, according to whichever method you choose.
The Breakdown: Understanding Home Loans
All mortgages are home loans, but not all home loans are mortgages.
A mortgage is what finances your home purchase, and your first mortgage may be the biggest debt you ever acquire. It’s important to consider every aspect of this decision—from your deposit amount to the loan features, to all the fees, costs, and fine print.
Since most homeowners don’t keep their first mortgage to complete repayment, many will refinance their home loans. This means getting a new mortgage to replace the old one. If you sell your home, the proceeds from the sale will go toward paying off your mortgage, hopefully with some leftover.
Other kinds of home loans include those taken out for home improvement projects, or to create a line of credit, which is known as a home equity loan.
Financial Literacy for New Families
It can be challenging enough to budget for you and a partner, but factoring in children requires you to really up your game. Let’s go over a few strategies to make every dollar count when you have kids.
It’s especially important to look at buying used items if your child has no older siblings or cousins from which to inherit clothes, books, and toys. Children grow so quickly that there is no real reason to buy everything new. Keep an eye on thrift shops, yard sales, and online stores to find gently used children’s’ items for much less than retail.
You can also swap items with other parents who have children of different ages than yours. If you do have to buy something new, become a comparison shopper—watch for sales, use online shopping tools and coupons, and put in some effort to find the best available price for the item.
Some families will choose to have one parent stay home while the children are young to avoid the ever-rising cost of child care. In some regions, childcare services cost more than college tuition or rent.
A recent study by the Economic Policy Institute showed that monthly child care for a household with one (4-year-old) child will cost between $344 in rural South Carolina to $1,472 in Washington, D.C. For families with two children (one 4 years old and one 8), the cost will exceed that of rent in 500 out of 618 communities.
That being said, every situation is different, and some families may need even the slightest extra income that two working parents will generate above the cost of childcare. But to help you better weigh the decision, here are some pros and cons to returning to the workforce instead of staying home to raise your children.
Often, a family will decide to have one parent stay home if that parent’s income would be negated by childcare costs. Yet, they may fail to consider the hidden cost of lower earnings in the future due to the work gap. In one study published by the Women’s Institute for Policy Research, results showed that after two or three years of if the workforce, a woman’s earnings may decrease by up to 30%.
In 2015, a Harvard Business School study showed that mothers who worked outside of the home were more likely to have supervisory roles and higher wages. Having both parents paying into Social Security will also result in a higher payout during retirement.
While the financial benefits seem obvious, there are equally serious drawbacks. You won’t have to pay as much, if anything, in childcare costs if one parent stays home. There will be less stress caused by juggling work and family life if one parent manages work life and the other has the home fort held down and taken care of.
Deciding whether or not a stay-at-home parent should return to work is not a decision to take lightly. Discuss all possible outcomes with your partner and create sample budgets for each scenario to help you make the best decision for your family.
Financial Literacy for Middle Age
The older you get and the more stable your career path, the more money you’re likely to have—but also the most responsibilities, as well.
Your Kids and College
If you are planning to support your child in their push through higher education, in whole or in part, be aware that the cost can be tremendous. Whether you’ve been putting away money since the birth of your child, began somewhere along the way, or haven’t started yet, you still have options.
A healthy first step is including your child in the financial process. It’s important that they know, for instance, the difference between FAFSA and an international trade agreement. Complete the application process for a grant or loan together and co-create a monthly budget, as well—especially if your child plans to work part-time while in school. If you are the parent of a dependent child, you can choose to apply for Federal PLUS loans on your child’s behalf.
Also, be prepared to set limits. If you agree to help with (or your budget only covers) four years of tuition, make that clear to your child upfront. They should know that any further education costs will be their sole responsibility.
Catch-Up on your Retirement Savings
It’s never too late to build up your nest egg, no matter how modest it is right now. A good way to start is to increase the contributions to your accounts, and a good time to start is after your children leave the house and you’re no longer responsible for expenses related to their rearing. You can put extra money into a CD, Money Market account or your savings account. Making the maximum contribution to your employer-sponsored retirement plan or your IRA is also a great idea.
If you’re planning to invest in order to get ahead, remain aware of advisory fees. To paraphrase the words of John Bogle, Founder of the Vanguard Group: the one certainty of the stock market is that the middle man (investment banker) always wins. Stay away from financial advisors who try to capitalize on your uncertainty and charge you for their “assistance”.
Taking Care of Your Home
Work on getting your house paid off to avoid making mortgage payments into your retirement and beyond. If that means sacrificing your annual vacation or forgoing that vintage car you’ve been wanting, so be it. If those small choices lead to eliminating your mortgage payments, you won’t regret giving up a few things now in order to secure your future.
If you want to keep your costs down without breaking the bank, you can try to reduce your energy bills by asking your energy provider to give your home an audit. Their recommendations may include upgrading your windows, adding insulation to your walls, or installing a programmable thermostat. Some of these updates, or similar ones, may even qualify you for a tax credit.
It may not seem very important right now, but the benefits of regular home maintenance can really add up. Even small, frequent tasks like replacing the air filters in your furnace and AC system, keeping electric baseboard heaters dust-free, and checking your faucets for leaks can keep your home running smoothly and help you avoid expensive repairs down the road.
Financial Literacy for Seniors
Many seniors will move from their larger home to a smaller one, once their children move out, or when they reach retirement age. This can reduce or eliminate housing costs, but there are other factors to consider before downsizing.
If, for example, you plan to move into a condo, you may be able to pay for it altogether or get away with a small mortgage—but expensive condo fees could negate your savings. Alternatively, you could choose to rent and keep your options open and your assets fluid.
Once you hit your 60s, it’s time to decide when you’ll choose to claim your Social Security benefits. You can choose to start receiving benefits as early as age 62—but the longer you wait to do so, the larger your monthly check will be. You will reach full retirement age at 66 or 67, depending on the year you were born, but waiting until you are 70 will give you the largest benefit. Once you are within 3 months of turning 65 if you intend to sign up for Medicare, do it immediately to avoid the penalty for late sign-ups.
Women and Financial Literacy
Today in America, women are often responsible for making and spending money. The fact that women typically live longer than men means that they will have to plan on funding a longer retirement than their male counterparts.
Yet women consistently underperform in financial literacy compared to men. According to a study from the Munich Center for the Economics of Aging, American women across all age groups consistently scored lower than men on a financial literacy test.
This can be especially problematic if a woman who is dependent upon a spouse or other family member for financial management is left to herself should that person pass away before her. If she is without a man in her life to assist her, she may pay out large fees to financial managers instead.
Learning how to spend responsibly at a young age makes a big difference. Unfortunately, basic financial skills aren’t necessarily included in standard school curricula, and learning often occurs ad hoc. Parents should indiscriminately encourage their children to learn about money from a young age to ensure that they will become financially competent adults. The better mothers become at handling money, the better example they can serve to their daughters—and their sons, as well—who may someday have daughters themselves.
Financial literacy is a powerful tool that everyone should possess. Money and its uses effects every one of us. Though as a country we don’t spend much time or effort educating children on this topic, I think we need to consider it just as important as any other part of a good education.
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