Personal Finance 101: What K-12 Didn’t Teach Us
By Allie Eklund
Being financially fit isn’t about having endless cashflow, or making a sixfigure salary. Financial fitness is relative to each of our very own situations. It’s not a bad idea to think of yourself or family unit as a business for your finances. All businesses, small or large must have healthy financials to succeed. No matter what level income you make, or what your current financial state is, here are a few first steps we can all take to get on the road to financial wellness.
Create and Monitor Your Budget
Be willing to have transparency with where you money goes, no matter how much resistance you may have. If you can’t have an honest conversation with yourself about how you spend your money, you may be on a trip down a very long river called denial.
Budgeting is two-fold and should answer these two questions: how much should I expect to spend and where am I spending it? Part one is to blueprint where your money will be used. Use this budget worksheet to work out your personal monthly numbers. This will tell you what you should expect to have left over, or how much your shortfall is. The second part of budgeting is what I call factchecking. See if rubber meets the road by comparing your blueprint with your bank accounts. For those who live in the digital age, try utilizing personal finance apps like Mint or Wally to track your spending for you.
Pay Yourself First
Do you constantly feel like you aren’t able to save any money? Two words for you: automate it. I used to be the type of saver that would sock money away if there was a visualized end goal in mind, like an upcoming vacation. This habit didn’t serve me well because it’s important to save without material expectations attached to the end goal. Saving for savings sake is called accumulation. Accumulation is the cornerstone to building wealth. Learning to save for nothing is challenging. Admittedly, that’s not a skill I had.
The fix? I opened an account at an entirely separate financial institution from my bank. Instead of transferring money from my checking to savings account, and back to my checking account when my impulses got the best of me, I now send that monthly savings allotment to an entirely different financial institution. This makes it inconvenient to withdraw that “savings” money, and aditionally creating instructions for an automatic transfer takes away that decision making process of “do I or don’t I put money away this month?” This has effectively defunded (most) of my impulse spending.
Start an Emergency Fund
Do you have at least six months living expenses available if you needed it? Life is full of the unexpected. Layoffs, hospital visits, broken appliances, you name it. We usually don’t plan to total our vehicles or lose our job. Emotionally draining as these unforeseen events may be, not being financially prepared adds insult to injury. Benjamin Franklin once said “by failing to prepare, you are preparing to fail.” Alleviate yourself and create a fund that literally is just for these unexpected curveballs life loves to occasionally throw our way.
Protect Yourself and Loved Ones with Insurance
Insurance is a pillar of financial security. It can help protect you, your family, and your most valuable assets. Consider this, how much are you willing to risk? Your family’s wellbeing is at stake when you don’t properly insure yourself. Although a difficult and emotional conversation to have, we all need to consider what the implications are if the unspeakable were to happen and you died tomorrow. Bear with me…who would you leave behind? How would they live differently if you weren’t here? What debts would need to be paid on your behalf? Is it worth it to go without insurance? If you have any dependents, such as a spouse or children, or major debts like student loans or a mortgage, then insurance needs to be addressed. Someone once told me that buying life insurance to cover your loved ones is the greatest love letter you can leave behind.
Contribute (more) to a Retirement Plan
Are you saving 10% of your earnings? If not, why not? Who is going to take care of you when you can’t work anymore? Saving for retirement is too often an afterthought don’t let this be a last ditch effort. By taking action at a young age, you can drastically improve your options. Pensions are becoming a thing of the past, social security is in question for future generations, and healthcare costs continue to expand, as does our life expectancy. Thus, planning for and anticipating needing more money than other generations isn’t just smart, it’s a must. Read more here.
There’s a lot to say about how to invest wisely. Let me start by saying a wise investment for your next-door neighbor may not be a wise investment for you. Your personal risk tolerance is a huge factor in how to invest, and that is an assessment each of us must do before making an investment.
Understanding the risk/reward relationship is vital to making wise investment decisions. That is, if you take a lot of risk, there should be adequate reward for doing so. There’s no such thing as an investment that carries no risk with decent reward. That’s what I like to call a unicorn investment. It doesn’t exist. If someone tells you they offer that, run Forest, run.
All investments carry risk, and risk isn’t static. An investment can become more or less risky based on the economic climate. It’s important to do a portfolio review at least once a year to assess what risks you’re exposed to and if such risks are appropriate for you. Understand your emotions. Are you investing on emotion? This could be the single most detrimental investing mistake people make. Money is emotional. Investing is more emotional. Seeing the money you worked so hard for fluctuate can be one of the biggest rollercoaster rides your stomach will ever feel. When you go on a roller coaster and it’s getting turbulent and suddenly you’re plunging downward, your stomach is now in your throat, would you unbuckle your seat belt and jump off? Probably not. But that’s what we see happen every day with investments. Too many investors go on this journey alone and jump off at the wrong time, leaving themselves with emotional and physical scars for the rest of their life. Having patience and emotional intelligence serves us well in many areas of our life, notably in investing.
Few of us may come into this world wealthy, but none of us are born with money management skills. Further, personal financial planning is not part of K12 curriculum in the United States, so it’s up to each of us individually to learn how to manage our money. It is a learned skill and it takes practice and discipline. We all are able to make these first steps outlined above, the question is are you willing? To quote a dear friend’s money mantra, “efforts today make profits tomorrow.”