THE INCREDIBLE IMPORTANCE OF FINANCIAL LITERACY

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I may be unnecessarily showing my age. There was a time when I was mystified by but aspired to understand the finance section of the newspaper. The National paper used to have pages of tiny print like this at the back, with abbreviated company names and a whole lot of numbers.

This mysterious represesentation of the financial world intrigued and intimidated me.

Those beginning their learning about personal finance and investing can find it mysterious and intimidating. Often, people feel high-level finance and investing education is not made for “People like them”.

Personal finance and investing for everyone. Over the years, investing has become a lot easier, with a far lower barrier to entry. With micro-investment apps, even students and low-income earners can now invest small amounts regularly. Given enough time, small amounts are all that is needed to create considerable wealth.

All the information in the newspaper (and far more) is available from a quick google search. Definitions and explanations can be quickly found online. But for most of us, all this data is completely irrelevant anyway. Most will start with broad-based indexed ETFs to rapidly diversify as they build.

After a few years of learning and observing, some investors will include thematic ETFs and individual stocks in their portfolios.

Over the decades, personal finance has, in contrast, become a lot more complex. And whenever things get complex, consumers tend to get cheated. With student loans, credit cards (instead of a cash economy), and buy now pay later schemes, consumers need a far higher level of financial literacy.

What is Financial Literacy?

Financial literacy is the understanding of financial concepts and the ability to use these to guide your financial decisions. Compound interest is the most important and powerful concept to understand.

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

Albert Einstein

Whether you pay or earn compound interest is a major determinant of your financial future. This really separates the rich from the poor…. and continues to widen the gap.

Why is Financial Literacy Important?

A US Study found more millionaire teachers than doctors or pilots. An understanding, and application of money concepts is therefore even more important than income earned.

Doctors, on generally high incomes will find it much easier to build wealth than teachers on their traditional wage IF they are financially literate. But teachers and other lower-income professionals can outsmart higher-income professionals with better financial literacy.

When is Understanding Money Concepts Important?

Those that dismiss learning about money as superficial and materialistic are usually fooling themselves.

Their intentional financial illiteracy impacts their future as they make daily financial decisions. Neglecting financial literacy can result in being stuck in a job after you want to move on, or retire or an inability to take time off for family. Ironically, by “not being interested” in money they can end up stuck having to work for money when they really need to take time off, or want a new career.

Financial literacy rears its head when we:

  • Choose to pay for groceries by credit, debit or cash
  • Buy lunch out (is it budgeted for?)
  • Buy a home
  • Choose a mortgage (and what a confusing trap this is)
  • Choose a career
  • Increase / decrease hours at work to balance your lifestyle (do you need to? can you afford it?)
  • Study / put in the hours required for promotion or not
  • Buy a car
  • Take on debt, or don’t (credit score)
  • Plan a holiday (and how to pay for it)
  • Set a retirement age (and hit or miss that goal)
  • Choose your childrens’ school
  • Sign up for the employer’s superannuation
  • Submit an annual tax return
  • Take out any insurance
  • Do or don’t consider asset protection once you have anything worth protecting
  • Have to navigate hundreds of offers, and potential scams, by email, post, phone, social media and in-person
  • Do or don’t get round to writing a will

How to Build Financial Literacy?

Poor people, people of colour and women perform on average more poorly in financial literacy tests. Check out the Standard and Poor’s financial literacy study.

Learning everything you need to know is not a fast or simple process. You will never know everything, or make the perfect decision every time. But improving your financial literacy will give you a chance of making helpful decisions, avoiding major errors. This, in turn, will make your future life easier, with more options.

“Money is better than Poverty, if only for financial reasons”

Woody Allen

Books

Find a book, there are so many to choose from. Best personal finance books – Aussie Doc Freedom. For those that aren’t particularly interested in finance, a book a year is a good start. Many readers, I suspect will be enthusiastic finance buffs and will need to be reminded to borrow books from the library where possible to keep costs low!

Blogs

If you like blogs, subscribe to one. You can subscribe to Aussie doc, or another blogger that resonates. It is especially useful to follow someone that is “like you”. We all benefit from role models that make our aspirations seem more possible.

Podcasts

Podcasts are great for the time-poor (aren’t we all) and those less enthusiastic about reading. Build it into your routine – a podcast for the journey home from work will build an enormous amount of knowledge over a couple of years. Here are my favourite podcasts.

Youtube

I confess, I still haven’t got round to making a list of youtube recommendations. There’s a whole lot of “Get rich quick” / scammy content out there to sift through. Some of the podcasts in the recommended list also have youtube channels. These are probably a good starting point if your preferred mode of learning is videos as they are recommended, reputable content producers.

Magazine

Money magazine is a paper print magazine (for now). If you prefer to have a physical magazine once a month, this is a pretty good source of information regularly.

Financial Literacy Courses

There are a few free structured courses on how to start investing in the stock market, including on the ASX website, the RASK website (free beginner and paid advance).

Regardless of your choice of mode(s) of information consumption, make a routine of regular reading/listening/watching over time. Try and get your information from 2 or 3 sources to make sure you get different viewpoints.

Reading a weekly finance email subscription is even manageable for those studying for exams.

Make a Written Financial Plan

Work out your goals and make a written financial plan. Every time you are about to make a big mistake, refer back to the plan. You should have a plan clear enough that, on receiving an unexpected windfall or inheritance, you already know what to do with it (as it just accelerates your original plan).

How do you Know When You’re Financially Literate?

There really is no endpoint to financial literacy, this is lifelong learning and new information will be available over time. Similar to your primary career, treat your finances as a lifelong journey you need to continue to learn and update yourself in.

You are financially literate enough to understand and identify the risks in investing, and know which risks are acceptable to you.

Financial Literacy for Kids?

Teaching your kids to manage their own money before they leave home and screw it all up with the first credit card offer is worthwhile. School’s are overburdened with curricular demands, and although there is a trend towards including some financial literacy learning, it is likely to be minimal.

Our job as parents is to teach all the skills your kids need to be independent (and as much as it’s possible to “teach,” happy) adult, contributing to society.

Allowances and/or pocket money give kids an opportunity to explore spending and saving as well as delayed gratification.

Conversations about the cost of groceries and what actually happens when you swipe your card teach your children important concepts.

Childrens’ money habits are apparently already largely set by age 7 (scary!).

A “Bank account” (excel document) paying generous interest can incentivize savings. I may live to regret setting up my 8-year-old’s “bank account” to pay 12% interest per year (paid monthly), he is very motivated to save!

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Sign up as an Aussie Doc subscriber for a weekly email with the week’s articles and any useful resources I’ve found in my reading. It’s a low effort, easy and free way to improve your financial literacy over time.

Aussie Doc Freedom is not a financial adviser and does need offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

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