About Financial Literacy.

There’s a commonality among Americans stemming deep within us beginning with our childhood and worsening throughout early adulthood.  Our collective understanding of one of the most vital components of our lives is crucially unacceptable, and it’s well past time for us to take control and rid ourselves of this problem.

In the Information Age, we’ve learned to use smartphones rather than maps to go from place to place and Google to learn about interests du jour instead of an Encyclopedia, and yet many of us cannot balance our own checkbooks.  Admittedly, Finance is not interesting to most and to still more it is rather intimidating – but it doesn’t have to be.  As with any topic, we can make small strides to further our competency and begin to create a foundation of understanding followed by practical application.

Granted, financial topics can go on and on causing us to go down rabbit-hole after rabbit-hole, however our discussion for this purpose will be limited to the basics to make sure no one is left behind.  Let’s begin with saying “it’s ok.”  Our lack of awareness and understanding will end, and the simple fact that we’re only just beginning is ok. 

Having said this, let’s jump in and play a little catch-up.

Finance is a broad term describing anything remotely related to the financial system (i.e. investments, money management, etc.).  I believe it’s always best to tackle a new subject by starting at the bottom.  More concisely – Money.  Money or currency is the lifeblood of our financial system and carries with it the viability of paying for living expenses, purchasing goods and services, building homes, operating a business, investing for the future, etc., and the mere existence of currency allows us the medium through which these expense and purchases are facilitated.  Although this concept and explanation seems simplistic and commonplace, without first understanding what it takes to pay for things we cannot proceed to building a fuller appreciation of finance.  After all, money is the electricity that makes the city operate.

Before making most decisions, our first question is how much does it cost?  Whether or not we care what the answer is (or better yet appreciate what the answer means) is typically not front of mind.  It should be.  Our first lesson leans smoothly and logically into Value.  Willing buyers and sellers must first “agree” on a price before making the decision to follow through with a given transaction.  This is the basis of Capitalism.  However, we typically place what we think we should do (e.g. to buy or not to buy) based on variables other than Value.  For example, it has been instilled in some of us since before we can remember that going to college is important, and the costs associated with earning a degree in higher-education should be a very low-level consideration or even overlooked completely.  Over several generations, we have now seen the consequences of this decision, and the resulting debt load carried by many are crushing, or at least marring, the picture which was once our dream.  Dramatic example or not, most of us know someone personally under the pressure created by this or similar experience.  I’m not suggesting we all avoid going to college, but rather let’s work through a cost-benefit analysis to evaluate all available options.  If I’m a resident of Texas and have the qualifications to get into the University of Michigan – Ann Arbor, I may pay an out-of-state tuition rate of $50,000 per year.  Alternatively, I might decide to forego moving to Michigan and instead attend the University of Texas at Austin with an annual tuition rate of only $12,000.  Arguably I receive the same quality education at less than a fourth of the cost.

As we delve deeper into the problem, we begin to see a clearer picture of why our financial decisions carry long-lasting and detrimental consequences.  Let’s then take a step back from a specific example and talk more broadly about underlying concepts over the next several articles.  We are going to venture further into many topics ranging from mortgages, loans and credit cards to stocks, bonds and other financial instruments.  After these concepts are outlined, we may then more comfortably glide into money management, asset allocation, retirement planning and ultimately Financial Wellness.

Financial Wellness represents a spectrum of overall peace derived from creating sound money management habits and taking an active role in eliminating debt, controlling expenses and planning for long- and short-term goals and objectives.  We know from happiness that major sources of stress involve money and our financial well-being, therefore a significantly higher level of satisfaction can be our well-deserved reward.