The Importance of Financial Literacy

Summary:

Financial literacy is crucial for lifelong benefits including preparing for retirement, understanding the consequences of financial decisions, resisting consumerism, and prioritizing spending on things that truly matter. For instance, starting early with retirement savings can prevent future struggles, while thoughtful financial decisions avoid unnecessary debts and purchases. By managing money wisely, individuals can free up resources for enjoyable activities and reduce work hours, enhancing overall quality of life. 

Intro:

Understanding the importance of financial literacy can create lifelong benefits for those who can learn about finance. Now, I am not talking about complicated equations or anything of that sort, just simple financial planning that a 5th grader could do with a calculator and some time.

Now, financial literacy is important for many reasons, but here are some of the more impactful ones:

1. Retirement
2. Consequences of financial decisions
3. Fighting back against a consumerism-focused society
4. Buying back time and money for things you actually enjoy

Now let’s take a look at each one individually.

Retirement.

No matter your age, God willing you make it to an age where you can retire, you will need a financial plan to get you across the finish line of your later stage in life. And I know what you might be thinking “Retirement is so far away, who cares?”

 I have seen adults in my own life push off retirement and then scramble as they get older because they won’t know how they are going to survive. And if you think you’re going to be different that’s great! Pay attention so you can actually start now and learn to be different.

Financial literacy can help you understand how much it will actually cost you to live but also plan for the unforeseen. Maybe you need some at home care or a place to live. Or maybe you need someone to drive you to your appointments or pay for a doctor to take care of you. The roof might be needing a replacement or the old car you’ve kept for the past 20 years has finally given out. 

We cannot plan for the unforeseen events but we can definitely have enough money to be ready for almost anything. Relying on your children or your children’s children is not a retirement plan. Let them live their own life and if they want to take care of you, great! But don’t rely on someone else for your own survival.

Right now, since I am only 20 years old, I am putting away money every month for my retirement. I put all of this into my Roth IRA with Webull and invest it into VOO which tracks the top companies within the U.S. With VOO’s proven track record and if I continue on this trajectory I will have over 1 million for retirement. 

Now unfortunately 1 million in the future won’t be enough to even buy a loaf of bread (maybe), I will also need to begin to add more money into another retirement focused account. I however cannot afford to invest more money into retirement right now, however I will in the future once I am out of school. I will also share more about what I learn about retirement as I move forward.

But hopefully you can at least understand why investing for retirement is so important. And if not, have a conversation with people in your life who are older than you and learn about how they are dealing with retirement/what fears they have about retirement.

Consequences of financial decisions.

Taking a loan for a car that you cannot afford to maintain.

Taking a loan for a degree that won’t provide benefits for jobs.

Buying a brand new golf set to show the guys at the club you’re cooler than you actually are.

Buying a Harley Davidson motorcycle to fit in with your cool uncle when you haven’t invested into retirement.

Buying a watch because it’s green and from far away it looks like a Rolex Hulk and the dial is able to spin which makes you feel special. 

You see, all of these financial decisions come with long term consequences that are easier to understand once you get a better understanding of finance. For example, Experian stated that in the first quarter of 2024, the average car payment was just above $700. $700! Now cool we all want a car and we feel like we deserve a nice car. But buying a car that you cannot afford to maintain is way more costly than just the monthly payment. Not only because of the increased cost of insurance but also maintenance. 

Buying a car you cannot afford comes with long term maintenance issues and a lack of resale value. So not only are you burning money with interest and depreciation, but you are also burning money by not maintaining your “investment” which makes it worth even less than it already does. 

Imagine what you could have done had you gotten a car with a $500, $400, or even $300 payment. Not only does this also come with a lower insurance cost considering the car is probably cheaper, but it also comes with more room to actually maintain your car so you love it for the long term. 

I was guilty of committing the last point. I bought a $300 watch because it looked like a Rolex Hulk from far away and I was excited to feel special. I wore it for about a week and then the feeling wore off and now I am stuck with a $300 watch I don’t wear. Now, had I waited and put my excitement away, I could’ve done a quick Google search and realized that online the watch goes for about $200. So right off the jump, I burned $100. Or about 6 hours of my working life that I will never get back. 

But this is more than just those 6 hours, had I invested that $300 into VOO like I do with my retirement account, I would’ve had … just kidding that’s not realistic, I wouldn’t have invested those $300. Let’s just be honest I would’ve spent it, but I could’ve at least spent it on something more memorable or important to me.

Always think about the long term consequences before you swipe or tap or insert or apple pay.

Fighting back against a consumerism focused society

I can’t even go to the beach without seeing an ad on the Ocean! There’s even ads in the sky with airplanes flying banners around! Everywhere you go ADS! ADS! ADS! My own bathroom has mini billboards everywhere! Logos, branding, and images all over my bathroom toiletries.

Companies want you to spend money on their products and they invest billions of dollars annually on ads to get your attention and take your money. And they don’t want your money on a one time purchase, they want you as a repeat customer. 

Now that’s how money works and that’s how people stay employed, but it is important to understand that for those of us regular consumers who get money through time spent working, we need to make sure we are aware of the money we spend and we fight back.

Don’t purchase aimlessly, purchase with a purpose. Get rid of your card that you have saved on your phone to prevent impulse late night amazon purchases. You don’t need that $30 makeup remover cleaner tool you saw on tiktok, you don’t even wear makeup!

Understanding finances can help us ensure that we are aware when we spend our money. This way we aren’t just throwing away our time to products and services we don’t truly need. Companies are out to get us, they want our hard earned money, and if we aren’t aware we will just spend it all.

There was this one time when I went to a book store for 1 book in particular. 1 hour and 13 books later, I was so happy with the deals that I forgot what book I was there for and left with a hole in my wallet. Hurray. Be intentional with your spending.

Buying back time for things you actually enjoy

Now going back to what I just said about being intentional with our spending, having a strong financial understanding of money can help us plan our money for things we truly want. Not just the things that are sold to us. 

Imagine had I not spent $300 on that watch, I could’ve used that money to go to the amusement park with my girlfriend, or save up for a finance seminar, or hosted a barbecue with my family. Now these things are what would’ve made lifelong memories and lessons. However because I was excited and impulsive and didn’t understand money, I wasn’t able to fight back and save for things I actually enjoy.

Not to mention, if you are able to spend less on things you don’t need, like rather than a fully loaded mercedes benz you can get a mid trim level mazda, you would free up your monthly budget by a few hundred dollars. And if you apply this same principle like downsizing where you rent or spending less on food that makes you feel gross, you can work less hours since now you don’t need as much money to survive! Think about it, if you are able to cut out $500 every month, you can work a couple less shifts at the supermarket or work less hours on your side hustle or not have to take overtime. This can give you more time for your family or friends.

This is a lot

I understand this is a lot, and you might not know where to start. No problem. Here are some quick steps you can do to get started.

1. Cut off monthly subcriptions you don’t truly love.
2. Remove payment methods from your smart devices so you make less impulsive decisions.
3. Rethink any one-time or monthly expense of $250 or more (or set your limit).
4. See if you can downsize any monthly expenses (like the car, rent, food).
5. Invest the extra cash into a Roth IRA account (or another retirement or investment account)