By Stephanie Yates
Any time I talk to a group for the first time, I try to answer that question that seems to hang in the room: “What makes you qualified to speak on this subject?” I could tell you that I hold a doctorate in finance, but that doesn’t necessarily make me an expert on personal money matters. I could even tell you that I’m a tenured associate professor and have taught courses in nearly all areas of finance, but I don’t think that’s it either. What I think makes me qualified to write about money are my practical experiences as a wife, a mom, a daughter, and a sister and how I rely on my education and experience to work through these often disparate roles. Therefore, I’m probably not much different from most of you. I do, however, have a passion for using my professional knowledge and experience to demystify everyday money matters in order to help folks make better financial decisions.
In trying to determine a good starting point for this column, I recalled a meeting I had recently with a colleague who talked about his money philosophy. He shared with me his “back of the envelope” list of money concepts that he felt everyone should know. Maybe he’s on to something here! If we can figure out what everyone needs to know about money, we could actually define what it means to be financially literate. In that spirit and to share with you my philosophy, I devised my own list with a few questions for you to consider related to each concept.
When we relate money to our personal lives, personal finance is really about creating, managing, leveraging, protecting, growing, and gifting wealth. Therefore, that’s exactly what my list covers:
1. Creating Wealth: This is all about earning active and passive income. Have you determined the career or business opportunity that best suits your skills and interests? Have you acquired the education (primary, secondary, post-secondary, professional development) that will enable you to excel? Are you putting in the work necessary to achieve your professional goals? Do you have a professional development plan?
2. Managing Wealth: Once we earn it, we need to manage it. Have you set financial goals? Do you have a budget tied to those goals? Do you reconcile your spending and credit accounts each month? Do you keep good records? Do you make timely tax filings?
3. Protecting Wealth: Life is filled with risks that we must assume, avoid, mitigate, and/or shift to others. Do you have adequate property, health, life, and disability insurance? Do you attempt to avoid or mitigate risks through responsible behavior? Are you careful with your personal information to limit the possibility of identity theft? Do you know what habits destroy wealth?
4. Leveraging Wealth: Too much debt can potentially lead to bankruptcy whereas too little debt could result in missed opportunities. Do you know which types of debt add burden and which types create opportunities? Do you have a plan for getting rid of any burdensome debt you have acquired? Do you know your credit score and how it is determined? Do you know how to correct mistakes in your credit file?
5. Growing Wealth: Saving and investing allow us to minimize our use of debt and plan for future expenditures. Do you have an emergency savings fund? Are you taking advantage of employer-sponsored savings opportunities? Are you investing outside of tax-advantaged plans? Are you aware of the power of compound interest, diversification, and portfolio rebalancing?
6. Gifting Wealth: Lastly, individuals should have end-of-life plans. Do you have written instructions indicating your wishes should you become incapacitated? Do you have a will or other document that indicates how you want your assets managed after your death and by whom? Do you know the tax implications of financial gifts? Do you have written instructions for your final arrangements?
Mastery of these six concepts is what financial literacy means to me. The concepts build upon each other and both knowledge and action in each area are critical in order for one to be financially literate. Financial literacy, however, does not ensure financial success. Success is more dependent on the personal attributes of discipline, tolerance, and patience.
Take a look at your answers to the questions. If you give yourself four points for every ‘yes’ answer and two points for every ‘maybe’ answer, what is your financial literacy “score”? Keep reading my column and we’ll build from there together!