Evaluating Your Financial Personality
When we talk about your financial personality, we're not making any value judgments. Whether you're a saver or a spender is part of your personality. It's sort of like whether you're outgoing or reserved, or whether you love Indian food or hate it. It's just something about you.
Being a saver or a spender isn't good or bad on its own, but either personality can cause problems if it's not managed properly. You probably won't need to look too closely at your own habits to determine whether you're a saver or a spender.
If you're a saver, good for you. It doesn't necessarily make you a better person, but you have a great start on managing your personal finances.
If you're a spender, don't despair. There's something to be said for living the good life. The only problem is, too much of the good life now is likely to mean less of the good life later. Your financial personality ties in directly to your financial situation, so spenders have to learn to exercise some self-control.
If you've determined that you're a saver, give yourself a pat on the back. Managing your personal finances probably will be a little easier for you. Now, get ready to assess your saving habits. Could you be saving more? Are you saving smart? Are you saving in the right places? Are you saving too much?
We've all heard the stories of elderly people who die in one-room apartments with few comforts, who, unknown to everyone, had savings and investments of a million dollars or more. They were saving their money to give to their children, or their church, or the local animal shelter. For whatever reasons, some people choose to forego comforts and even necessities (heat, air conditioning, even food) in order to save their money.
It makes no sense, of course, to save so much money that you don't have the things you need and some of the things you want. After all, that's why we work. It's a rare person who would continue to show up at the job every day if the paychecks stopped coming.
There are no guarantees in this life, and unfortunately, some of us won't even make it to retirement age. It would be tragic to deny yourself everything you want in order to save money for a day that never comes. It's important to strike a balance between extreme frugality in the name of saving money and a devil-may-care spending spree that compromises your financial future. You'll learn more about saving and investing for the future in the upcoming chapters on investments and retirement funds.
If you're a spender, you can console yourself with the fact that you're far from alone. Most people find it much easier to spend money than to save it. From the time we're children in America, we're sent a clear message: Go ahead—spend. Whenever we watch TV, pick up a magazine, or get on the Internet, we're bombarded with advertising telling us to spend. Buy cars! Buy beer! Buy shampoo! Buy jeans! Buy anything, but buy!
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One hundred years ago, people made a lot less money than they make today. They spent a whole lot less, too. One reason was that there was simply less to buy. There were no malls, no television shopping clubs, no luxury vacation condos, and not many expectations.
Try this exercise: Choose one room and identify all the things in it that are unnecessary and unused. Then, estimate the cost of each item and add them up. When you've finished, multiply the total by the number of rooms in your house. If you invested the total you just came up with, you'd no doubt enhance your retirement fund nicely. Think about that the next time you're in Pier One.
We are part of a society that pushes spending and consumerism, and we're bombarded every day with the message that spending money is good. Is it any wonder so many of us spend so much?
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What is Financial Literacy?
Financial literacy is the education and understanding of various financial areas. This topic focuses on the ability to manage personal finance matters in an efficient manner, and it includes the knowledge of making appropriate decisions about personal finance such as investing, insurance, real estate, paying for college, budgeting, retirement and tax planning.
Financial literacy also involves the proficiency of financial principles and concepts such as financial planning, compound interest, managing debt, profitable savings techniques and the time value of money. The lack of financial literacy may lead to making poor financial choices that can have negative consequences on the financial well-being of an individual. Consequently, the federal government created the Financial Literacy and Education Commission, which provides resources for people who want to learn more about financial literacy.
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The main steps to achieving financial literacy include learning the skills to create a budget, the ability to track spending, learning the techniques to pay off debt and effectively planning for retirement. These steps can also include counseling from a financial expert. Education about the topic involves understanding how money works, creating and achieving financial goals, and managing internal and external financial challenges.
Financial literacy helps individuals become self-sufficient so that they can achieve financial stability. Those who understand the subject should be able to answer several questions about purchases, such as whether an item is required, whether it is affordable, and whether it an asset or a liability.
This field demonstrates the behaviors and attitudes a person possesses about money that is applied to his daily life. Financial literacy shows how an individual makes financial decisions. This skill can help a person develop a financial road map to identify what he earns, what he spends and what he owes. This topic also affects small business owners, who greatly contribute to economic growth and stability.
Financial illiteracy affects all ages and all socioeconomic levels. Financial illiteracy causes many people to become victims of predatory lending, subprime mortgages, and fraud and high interest rates, potentially resulting in bad credit, bankruptcy or foreclosure.
The lack of financial literacy can lead to owing large amounts of debt and making poor financial decisions. For example, the advantages or disadvantages of fixed and variable interest rates are concepts that are easier to understand and make informed decisions about if you possess financial literacy skills. Based on research data by the Financial Industry Regulatory Authority, 63% of Americans are financially illiterate. They lack the basic skills to reconcile their bank accounts, pay their bills on time, pay off debt and plan for the future.
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