Financial Literacy

Financial Literacy

Financial literacy is more than just being able to balance a checkbook, compare prices or get a job. It also includes skills like long-term vision and planning for the future, and the discipline to use those skills every day to reach your short, mid and long-term goals. 

In the US, financial literacy for the most part is not taught in schools. As a result, few young people know how to manage their personal financial lives.  The US is ranked only 16th in the World in financial literacy and Americans are paying the price.  Consider a few stats about how the typical American handles money:

– Nearly four out of every five U.S. workers live paycheck to paycheck.

– Over a quarter never save any money from month to month.

– Almost 75% are in some form of debt, and most assume they always will be.

Most dreams in life require having the money to achieve them – buying a new home or car, taking that trip of a lifetime, sending children to college or university, or retiring in comfort.  But skyrocketing costs, mountains of debt, lack of savings and a lack of an understanding about how money works have forced many people to downsize or even eliminate their dreams.

By understanding your goals and developing an action plan to reach those goals, you have a road map to create the life you want.

There are 6 building blocks to developing a financial plan:   Cash Flow, Debt Management, Emergency Fund, Protection, Asset Accumulation and Preservation.

Cash Flow

The first step in developing your financial strategy is to evaluate your cash flow – the money that comes in and goes out every month. Money comes to you from both income sources (such as salary) and asset sources (such as cash dividends or withdrawals). This money is used for outgoing payments (such as taxes, debt payments or lifestyle expenses). Some payments are fixed and essential.  Other payments represent discretionary spending which are expenses that often represent the “nice to have items, or wants” and not the basic “needs” of everyday life, and which may be reduced in an emergency.

Debt Management

The effective use of debt can enhance your financial plans. On the other hand, few things can derail your financial dreams faster than excessive, revolving, high-interest credit card debt.

There are situations where debt is not only a necessity, but potentially smart. Debt can actually provide flexibility and convenience that can help you manage your money and provide for your lifestyle needs.

Even when using debt for “good” purposes, though, care must be taken that the debt balance doesn’t outpace your ability to make the payments.

Bad uses of debt can be the biggest obstacle for achieving your desired lifestyle. Debt that spirals upward because of high interest charges and poor purchase decisions can strain monthly cash flow. Large interest payments perpetuate the debt and can consume the cash flow necessary to maintain your lifestyle and to accomplish your goals.

All debt, good and bad, must be analyzed together for proper debt management. Better debt management means better cash flow and better financial planning. Debt management starts with examining your existing debt. You should examine each individual debt as well as your total, overall debt. Total debt is often analyzed by comparing earned income to debt payments.

Accelerating the payoff of your debt can be achieved by strategically applying regular additional payments. Becoming debt free often takes courage, resolve, and discipline applied over an extended period of time. The peace of mind and the sense of freedom that come from being debt free are well worth the effort. Further, you’ll likely save yourself a significant sum in potential interest payments.

Generally you will save the most by paying off the highest interest debt first, but some individuals find it is easier to maintain the program if they see early success by eliminating some debts entirely; this can usually be achieved faster by paying off the lowest balance first.

Emergency Fund

Whether natural or man-made, disasters and emergencies can happen at any time. Even a small catastrophe, requiring cash, can occur with little or no warning. The key is to be prepared for whatever events life throws your way.  Consider how you would pay for small unexpected events. A source of available funds can provide the peace of mind of knowing you can recover quickly—with the least disruption to your life. 

A good rule of thumb is that your emergency fund should equal 3-6 months expenses. Emergency funds should be kept in the form of liquid (and generally “safe”) assets that can quickly provide the resources needed during a short-term financial crisis.


Life insurance is very important.  The basic rule of thumb is to have enough life insurance to provide approximately 10 times your annual family income.  But there are many other factors that should be taken into consideration, including your age, your medical condition, how many dependents you have, your income or current financial status, and most importantly, which tasks, or uses, do you want to assign to your life insurance policy. 

In the event of your death (or life events with the new living benefits), your life insurance policy can protect you, your family, your standard of living and long-term financial plan.

Asset Accumulation

One of the most important steps you can take toward financial independence is to pay yourself first. Everybody has regular expenses and bills, and often savings comes last, “if there’s any money left over,” which there too often isn’t.  Make a commitment to regularly save a specified percentage of your income or a specific dollar amount and set it aside first. Then keep the commitment.

Procrastination can be the enemy to your success in preparing for retirement or other future financial needs. Time can magnify the impact of growth and compounding on your assets. The more time you have, generally the smaller the amount of money you need to set aside each month to achieve your goals. Getting started is often the most difficult step of any strategy, and at any age it’s easy to find an excuse not to save for retirement. 


Don’t let a lifetime of successful savings be devoured by taxes, lawyers and unintended heirs. A proper estate plan can take care of your family during your life and after your death. Estate planning can help you develop a firm strategy for the proper transfer of your wealth. By minimizing the costs associated with transferring wealth, you can increase the amount passed on to your heirs.