4Tests Blog

Financial literacy is one of the most important things to learn that isn’t being taught (regularly) in school. It’s really something that should be taken up in junior high and high school, yet many college graduates find themselves coming to the end of their run without knowing how to take care of their money.

In the following article, we plan to give you the tools to turn all of that around before you’ve made a mess of things. But first, let’s take a look at the missteps that usually lead to disaster. To borrow from religious imagery, we’ll call these the:

7 Deadly Sins of Finances

There are basically seven behaviors or mental attitudes that will lead you astray when it comes to finances. If you can master all of these, you’ll be in a great position to take the 12 financial literacy lessons we’re sharing in a bit to heart. Let’s break down each one.

Overanxiousness 

Being overly anxious can lead to some horrible financial decisions. It’s what causes us to buy the house or car we can’t afford. It’s also what leads us to make poor college decisions, like enrolling and borrowing money before we have any inkling of what we would like to do with our lives. Big mistake. Stop trying to speed things along. It’s better to be late to the party than to have to play catch-up because of bad financial decisions.

Not Understanding Good Credit vs. Bad Credit

There probably should be laws against pitching credit cards to freshmen on a college campus. This is a vulnerable time for college students because they’re just getting their first taste of independence. Along with calling the shots in how they spend their time, they have this company telling them, “Here’s money you don’t have to pay back right away. Take your time!” Of course, you’re going to get yourself into financial trouble! That said, there is such a thing as good credit, but as you’ll find out later, bad credit decisions can keep you from accessing it.

Failing to Budget

Budgeting may seem constricting or boring to you, but it’s the only way to avoid the financial missteps that so many college students fall into when tempted by Spring Break trips, nights on the town, and going out to eat. You just can’t win if you spend more than you make. So don’t even try it!

Failing to Save

Saving is just as important as budgeting because you’re not going to be able to work at the same level that you can as a younger person your whole life. At the same time, costs will keep going up, Social Security won’t be enough to pay for everything, and interest works wonders on what you save if you start early and contribute often. Failing to save can put you in the pauper’s house right as your best-earning years are complete.

Laziness

Being lazy financially means failing to budget, failing to save, refusing to take courses that’ll improve your marketability, or thinking you’re too good for certain types of work. If you’re an able-bodied person, there will always be opportunities to earn money. It may not always be what you want to do, but that’s life. Sometimes you have to do what you don’t want to do to be able to do what you do want to do.

No Attention to Detail

Having poor attention to detail will keep you from a number of “wins” in life. It can get you fired from lucrative jobs. It can cause you to miss spending when putting together a budget. It can affect your studies, which leads to shoddy work and poor grades. Attention to detail, on the other hand, is what makes you marketable.

Giving Up

There will be financial ups and downs in your life. It happens to most everyone. That’s why they talk so much about “the 1 percent.” Ninety-nine percent of us will know what it’s like to have to miss a meal or pay a bill past its due date. You can’t give up, though. You have to start where you are, plan where you can, and have faith that your fortunes will (eventually) turn around.

And Now the Financial Literacy Lessons

So now that you know the deadly sins to avoid, it’s time to learn those financial literacy lessons. We’ve promised you 12 of them, and that’s exactly what we’re going to give you, starting with:

1. Budgeting

Budgeting means more than spending less than what you make. It means having a clear grasp on what you need to spend versus income. Only when you’ve reconciled that your income is more than your needs (and yes, needs include taxes) should you consider spending on “fun” things.

Your budget should also account for probable unplanned expenses. Think about the tires, battery, or oil changes your car will need. Perhaps you’ll have a fender-bender and will need to pay a deductible. All these things go beyond the everyday, and you need to have enough “in reserve” to plan for them.

2. Understanding True Costs

If you buy a $60 item, you may think the item only costs $60. But you would be wrong. That’s because every purchase you make has three values, and all are important. These values are as follows:

• Face value: this is the $60 purchase price.
• Time value: how long it takes for you to acquire the $60 that item will cost. If you spend $60 you hadn’t planned on spending, for instance, you’ll need to get that $60 back, so it will mean spending the initial $60 for the purchase and working X number of hours to recoup that expense.
• Opportunity value: what opportunities will that purchase cost you if you’re having to work X number of hours to get it?

When you realize that each item has three values, you start to slow down and really consider what you’re spending better. Perhaps you’ll even decide some purchases aren’t worth it.

3. Saving in Increments

Saving just 5 percent of your check can make a huge difference if you start early and stay consistent. If you start saving at 22 years of age while you’re making $30,000 fresh out of college and your income increases, on average, just 2 percent a year, then you’ll have more than $517,000 when you retire at age 67. The reality is that you’ll earn much more than that during your “prime” earning years from 40-60. Keep saving and stay the course.

4. Getting Insured

Insurance is a nice fail-safe if you’re having financial troubles at any point in your life. You should buy an insurance policy before you have anyone to give it to. Sounds crazy, we know. But those policies get a lot more expensive if you try to get them later in life. It’s dirt-cheap when you’re young and healthy, and some policies can even build cash value that can be borrowed against or withdrawn completely if you ever run into a bind and need the money.

Also, when you do finally decide to settle down and start having children, you’ll have a financial instrument in place to help take care of them. That’s especially important if you don’t feel you have the room in your budget to start saving aggressively.

5. The Importance of On-Time Billpay

Paying your bills on-time, even if it’s just the minimum payment, is important. Why? Because the three major credit reporting agencies use on-time bill payments as an indication of credit quality. If you’re constantly late on your payments, then your credit will take a ding, thus affecting your overall score. Bad scores make it harder to get financing on good credit like home or car ownership.

6. Credit Utilization

Your credit utilization ratio — or how much unsecured credit you use compared to how much is available — has a tremendous influence over your credit score. When it gets to over 30 percent, your score will take some serious dings even if you are making your bill payments on time and not defaulting on any loans.

7. Spending Less Than You Make

It’s the first rule of budgeting, yet so many people all over the world find it difficult to keep up. That’s partly because they fail to realize the little expenses that add up. (The Starbucks coffee every day, eating out with friends, impulse buys at the grocery store or Walmart, etc.) To avoid spending more than you make, you have to sit down, focus, and really take inventory over every last detail of your spending.

How much goes to Netflix or other streaming services? Do you buy any apps or pay for ongoing subscriptions of some kind? Once you take a detailed inventory of things, it becomes easier to find the places you can cut.

8. Protecting Yourself

There are all kinds of financial pitfalls out there to avoid. From protecting your PIN number at the ATM machine to loaning money to people you trust who later screw you over, protecting yourself financially takes many forms. Don’t let people take advantage of your kindness.

9. Fighting the Urge to Have It All ASAP

We live in a want-it-now culture, and it’s tempting to fall into that trap with everything. We want a bigger house than we can afford now rather than later so we stretch ourselves too thin getting into it. Same with a car, phone, or computer. Stop trying to have the best everything right this moment. If you take care of your money “in the now,” then you’ll find you can afford a lot better stuff without breaking the bank later on.

10. The Hidden Cost of Home Ownership

And when it comes to home ownership, try to remember the hidden costs that you’ll have to pay aside from the mortgage. This could include property taxes, mortgage insurance, and, yes, ongoing repair and maintenance costs to the structure and property. Estimate those costs and build them into your budget.

11. Managing Stress Is Part of Managing Your Money Effectively

The more stressed out you are, the more likely you’re going to seek “retail therapy” to feel better. By that, we mean buying stuff you don’t really need to give yourself a boost. Not wise. Yet millions of people suffer from giving into the temptation. If you have a stronger knowledge of your finances, this is easier to avoid.

12. Always Plan for Major Purchases

You don’t just rush out and buy a home or car. You plan for it, think about how you’re going to afford it, and pull the trigger when it makes sense. That’s the way you should treat everything else, from VR goggles to new phones and smartwatches. And never forget the three costs of every purchase!

Financial Literacy Should Be Taught in School

Unfortunately, it isn’t. At least, it isn’t with organized regularity. And you really need it most when you’re about to face the world on your own for the first time. Hopefully, the financial literacy lessons presented here will help. Good luck as you move forward!

[Featured Image by Pixabay]