EP 126: How To Improve Your Financial Literacy Mindset

Financial literacy is all the rage as we enter in a new year. How can we set ourselves up for better financial success this year? 

Improving your financial literacy sounds like a college course but it really is just looking at few different categories and how to change your mindset towards them. 

The ultimate goal focuses on how you understand and manage your money and where to move forward from there.  

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When I started my journey to become a millionaire, one of the things I first looked at was how I was making money.

By basically exchanging your time for hours worked, you get to take home a paycheck. So if you work eight hours, you get paid for eight hours.  While salary is a fairly straightforward concept, there's an also emotional component to it.

I remember someone would get upset at their manager or boss and they claimed they were quitting after they came back from lunch. But if you quit your job, what about your bills?  You'll still have bills to pay even after you get your final check. What if you can't get another job right away? If that's the case, you actually hurt yourself more than you hurt your company or your boss by quitting. 

That's what the mindset of financial literacy is really about: understanding money, the impact of your decisions, and how they can affect your financial future.

Budgeting to some people feels like the handcuffs are on them. They don't want to have a budget. To me, financial literacy with respect to a budget means that I would never get caught off guard.

I knew what my budget was so I never had to feel pressure to do something or pay for something and worry about it. Budgeting gave me permission to be able to spend money because I knew exactly how much I had to spend.

Budgeting in its simple terms is keeping a ledger of how much money you have and how much is going out. Knowing what those numbers are will help you understand what's going on with your money each month.

I always knew early on that I had to decide my needs versus my wants when spending money. When I was in college, I saw a lot of my friends and classmates buying items outside of their budgets. Because we were friends and making similar incomes, I knew that would put them in a bad financial situation. 

I like to call it "mortgaging your future". Mortgaging your future is purchasing  an expensive item to enjoy right now that's outside your budget. Meaning you have to pay for it with future earnings... the money you haven't made yet. 

You tell yourself, "well as long as I keep making this much or nothing happens with my job, I'll be fine." What happens if 6-12 months from now you get laid off, fired, downsized, or the economy slows down, and suddenly you're not making the money you thought you would.

Or I've seen people say they are going to get a raise or a bonus, and they start spending the money as if they already got it. Then they don't get the raise or bonus but they have already spent the money and are stuck. 

That's where financial literacy comes in. Knowing what you need versus what you want. Also understanding what happens if you spend that money before you have it and the cause and effect of making that decision if something bad happens.

When I think about investing, I considered how wealthy people take advantage of only having 24-hours in one day. How can they make the most money each day being only one person? 

One of the best ways to do that is to invest. If you make $2,000 a month but maybe you're able to put $10,000 in an investment account. If that account could make $2,000 a month... you have just successfully duplicated your income.

It's having the mindset of: how do I make more money without sacrificing more time? You can have your money work hard for you in the stock market or real estate. If you're able to purchase a property and rent it out, every month that rent check gets you closer to duplicating yourself and income.

The other thing that's beautiful about investing is your money doesn't get sick or go on vacation. It just goes where you send it. If you send it to the right places, it usually comes back and brings some friends to the party (which means it made some more money).

The last thing to learn about financial literacy is just a general understanding of how money works. By general understanding, I'm talking about things like interest rates,  credit cards, and different types of payments.

As an example, when you look at your car insurance: what's the lowest deductible that you can choose? Typically the lowest deductible available is around $500 (in the United States) but what I didn't understand was that there was also a second tier. This tier had a $1,000 deductible.

I was worried if something went wrong I couldn't afford the $1000 for the deductible. I looked at the $500 deductible plan and how much I was paying every month and compared it to the $1,000 deductible plan. The $1,000 deductible plan would actually save me $50 a month. Over 12 months that would save me $600! 

Realizing I could have been saving $600 a year for the last five years... I would have had an extra $3,000 that I could have used to spend, save, or invest. So that general financial knowledge comes in handy when you can break down necessary payments. 

We don't want to just focus on the lowest payment we can get. In this example, the lowest deductible didn't actually work for me in the long run. It just takes thinking if I make this decision how does that affect my finances and if I make this decision how does that affect my finances

As you think about financial literacy and the mindset around it, it's not about being smart or if you went to school and got a degree in Finance.

It's really about just taking a step back and asking yourself, "if I make this decision now, how does it affect my finances in the future?"