Lack of Financial Literacy- What’s the Risk?

Get Comfortable with your money.

As I began this blog creation process, I also started to explore a community of women, particularly women of color, who were successful in their ‘side hustles’.  A big focus it opened me up to is finances.  It got me thinking, I spent over 6 years in education for my job.  I invested thousands of dollars into my degrees to get a job.  I have my job to earn money.  So why wouldn’t we spend some time and invest into ourselves to become educated about money.  Financial literacy is important and a skill I can learn.  

I recently listened to a podcast that Linda Garcia was a guest on and she said the root word of wealth is health (podcast: Wait, hold up!).  It is healthy to work towards wealth.  There is often a negative connotation with having wealth goals, but we can overcome that.  There is also often frustration due to the lack of financial literacy we have, but we can overcome that too.

The first step is determining your why, to get focused and motivated. Why do you want to gain this financial literacy and gain wealth.  Once you have that clear goal in mind, you can effectively take steps towards achieving it.  This article will outline some basic steps and knowledge regarding several financial literacy topics.

Credit Scores

Good credit scores are necessary for loan approvals, such as your house and cars, as well as approval for certain applications like apartment rentals.  The better your score will also provide better interest percentage rates on loans.

How do you have ‘good credit’.  Well, first – check your credit score to see where you stand.  If you don’t know what it is, or how it is being effected, you will not be able to improve it.  Use resources like creditsesame.com or creditkarma.com (also available in apps), which will pull your credit score.  These resources will also break down your score in detail of what is effecting it.  Some categories include:

The Age of your Credit History

How long since you opened your first account in your name.  If you pay towards your car, but the title is in someone else’s name, that will not help your history.  Don’t stress about this one, all you can do is begin.  And by reading this, you are going in the right direction! 

Late Payment History

Yes, they track EVERY late payment.  Again, if you’ve been late in that past, no point stressing on that.  Just change your habits and start to pay on time.  Set up that auto-pay you have been meaning to do and get your payments in.

Credit Utilization %

This is in regards to lines of credit you have, and how much you are using of it. ($100 spent on a credit card with a $1,000 limit = 10% utilization rate).  Keep this low, and ideally at 0%.  Paying credit card interest is a big waste of your hard earned money.

Any Previous Account that went to Collections

Checking on your credit is a good and necessary place to start to determine what is even out there.  If you are expecting something that does not appear, these ‘derogatory’ accounts do fall off after 7-10 years.  If there are any remaining, work with the creditor to see what your options are to get them paid off and removed.

# of Accounts

The actual number of accounts you have in your name.  This can be a combination of mortgage, car loans, student loans, credit cards etc.  The credit bureau actually prefers you have a higher number of accounts, in good standing of course.

Now that you know what your credit score consists of, start working on the items you have control over.  Timely payments, keep your balance on credit cards low (even better, Zero) or obtain a secured credit card if you are just getting started.  Also remember to determine if any derogatory accounts can be removed.  It will take some time, but you will start to see an improvement.

Debt

There are a couple of methods out there for tackling debt.  The snowball method refers to paying off your smallest debt first and then continuing payments you would have made to that account towards the next smallest account and so on.  Another method is the debt avalanche method which has you putting the extra funds to whichever account has the highest interest rates. Regardless of the method you choose, you are still tackling your debt.  Hooray for you!

Budgeting

This one is critical, mainly because through budgeting you achieve an awareness of your money.  With auto-pay, direct deposits, and the ease of credit or debit cards, we are removed from the realness or our money.  So we need to get right back into it and know what’s going on.  Budgeting can help you achieve this.  Again, the way you go about it is completely up to you.

I used the ‘Every Dollar’ app (free version).  Plug in all income, set up your categories of expenses and amount you think they will be and begin tracking what’s spent.  This can be time consuming, but in the beginning I highly recommend it.  Enter in all transactions that occur throughout the month into your budget so you have a real picture of what occurred at the end of that month.  Reflect on your month to see where you went over, what was surprisingly more or less and make necessary changes.  Once you do this for a few months you will have a much better idea of what is happening with your money.

401k

A 401K is a retirement investment account.  Although retirement may seem very far away, it will be beneficial for your future self to take some steps now to prepare for it.  I highly encourage you to reach out to HR and inquire of any employer matching they may offer.  This means they will match a certain percentage of money you place into your investment account.  And if you know me, you know I love me some FREE MONEY! Another great resource, is the company your employer uses, typically has a representative who is knowledgeable of these accounts and finances in general.  Set up an appointment and let them help you.

Net Worth

Investopedia.com defines Net Worth as “the value of the assets a person owns minus the liabilities they owe”.  Simple equation, yet not something we think about often. I recently read the book, ‘Rich Dad, Poor Dad’ and a key word that stuck out to me was “Assets”.  What exactly are “assets”? Assets are something you own that have value.   Some examples include:  your money in your bank account, real estate, and investments.  Liabilities would include any debts you have (mortgage; student loans; credit cards etc.).  If you are curious what your net worth is, you can use Personal Capital. I liked this app because once you have it set up, it will update automatically.  It can also be used for budgeting.

Investments

I’m new to this topic, so I’m not here to provide guidance on this, but simply to put the thought in your mind.  Are you currently investing?  Would it be something you consider?  There are a lot of resources available to increase your knowledge on this topic.  Yes, there are risks with investing, however if you plan appropriately you can minimize them.  And to quote ‘Rich Dad, Poor Dad’, “People who avoid failure, also avoid success”.

FI/RE

This one is fun and exciting.  And you may not be ready to hear about it yet, but I’m going to tell you anyway.  FI/RE stands for Financial Independence Retire Early.  What this topic means can vary for person to person.  How you will go about achieving it would need to be tailored to you.  Some attempt it aggressively, by being very tight with spending now, so they can achieve this sooner.  Others will chip away at it and be content with simply retiring a few years earlier than initially anticipated.  Also, the word ‘retirement’ can be used loosely as many will ‘retire’ from their full time 9-5 but still bring income through other passion work.

I hope the discussion of these financial literacy topics intrigued you to learn more.  Finances can often feel overwhelming and stressful.  It’s important to take it one step at a time and continue to build your knowledge.  Financial literacy is a skill.  As you learn more (and you are capable of this), you will increase your competence and confidence.  Get healthy, and build your wealth.  You deserve it.