Financial literacy is a growing topic of interest in the United States, and we believe everyone should know the fundamentals of finance and budgeting. Thus, to celebrate financial literacy month, we are penning today’s post on the four introductory concepts and habits every adult should know and practice.
Balancing your spending habits
Once you attain your first job with an income, it is essential to learn how to track your earnings and expenses so that you can stay cash flow positive. For those new to the topic, cash flow positive means you spend less than you make.
While this sounds relatively easy, many find the activity harder to practice due to easy access to credit cards. Therefore, we encourage you to practice a routine where you only spend up to 80-85% of your monthly income. By underspending, you ensure you have additional funds to budget for unexpected expenses or savings.
Prepare for the unexpected
It would be fantastic if life always went according to plan. Still, unexpected things happen regularly, and most Americans have little set aside for a financial emergency, such as significant vehicle repairs or a hospital bill.
When surprises arise, many adults go into debt to make ends meet. Thus, saving an emergency fund to cover significant expenses or job loss is vital. A good starting place for an emergency fund is two to three months' worth of your take-home income.
In the US, we rely on a credit-based system as the backbone of our daily lives, and even those who don’t have credit cards or mortgages are assessed on their creditworthiness when opening a phone line or buying certain types of insurance. Thus, for those who want to borrow money to buy a home, start a business, open a phone line, get insurance coverage, and more, maintaining a good credit score is mandatory.
One easy way to build credit in the US is by opening a credit card with your local banking institution and placing recurring charges on it monthly. Once you have set this up, all you need to do is set up auto-pay for the monthly balance. By doing this and paying off all charges incurred regularly, you will avoid fees and interest while helping establish your creditworthiness.
Investing in your future
Once you have balanced your budget, saved up an emergency fund, and started establishing your credit, you should begin investing in your future through purchasing mutual funds or ETFs in a retirement account.
For those individuals who are offered a 401(k) at work, this savings vehicle is a great way to start preparing for your future.
Many companies often match employee contributions up to 5% and offer target date funds, which automate investing by changing the risks taken as one progresses through life.
For those who do not have a 401(k), consider an IRA or Roth IRA for preferential tax treatment on the monies you place in them. Then, select an investment strategy using either target date funds your broker provides, hire an investment advisor, or invest in an index fund that tracks the S&P 500.
Regardless of your strategy, starting sooner than later is the most critical step. Then, once you have amassed a pool of money one to two times your annual income, consider meeting with an advisor to see what improvements you could make.
Financial literacy is a skill everyone must learn as they progress through life. Through hard work, determination, and patience, you can succeed in mastering your finances.
For those who are just beginning their financial journey, have already started it, or are nearing retirement and want a professional opinion, please contact us today to schedule a consultation. We want to help you succeed, which starts by understanding your goals and present situation. We will look forward to meeting you soon!