What’s It For? – Financial Literacy

With children and adults who are a little behind, financial literacy has two parts.

The first is how your financial world works. For children, the idea is earn – spend – save – share and invest. Children don’t have a big ability to move money in time but adults do. Debt is part of their equation and should include debt. Debt is like saving, only in reverse. Debt moves earnings from the future to the present, while saving moves money from the present to the future. Understand the program.

Tools won’t make it happen

The need something to attach themselves to.

The various tools and an idea about how they move money in time are crucial to know. Read the manual. A simple signal is the more they are promoted, the worse they are for you. I had clients in the movie industry years ago and they know the easiest way to know a movie had bombed was they had to advertise it after release. Good movies don’t need much advertising support after release.

Once you learn about the tools, you will see their validity.

Tools are for three things

  1. To move money in time
  2. To mitigate or eliminate risk
  3. Sometimes there are plans that make your life smoother. A dental plan is like that. It is unlikely you will have claims that exceed the premiums, but it helps make next month’s spending more predictable.

What is the payoff for financial planning?

Life is easier if you know generally where you are trying to, and, more specifically, where you want to go next. You need to know your resources, tools, ability to use them, and ability to get others to go along with you or use their input to improve your plan.  It is quite easy in the general sense because there are no measurable goals or execution of specific tactics.

Plans that lack specificities are more dreams or conversation items. Interesting but not very useful. They create an image of doing something while missing the real point.

Planning demands objectivity, and validation

That’s where financial literacy comes in. Failure to do objective planning and to execute on the highest immediate priorities is stress-inducing. Anxiety-inducing, at least. You don’t learn much unless you do it, and no one is good at it out of the gate.

Learning how planning is a process and plans, other than the ones with the shortest duration, are more compass than map. Short-term plans like an annual cash flow budget tend to be more maplike. If you have a sound direction because you have invested time and effort into clarifying your vision, resources, and supports, then tactics – the doing part is much easier.

Financial literacy clarifies the doing by helping you understand how the tools work and how to assess the ones most appropriate to your priorities and resources. The longer, fuzzier planning parts are where you derive priorities and ways to develop and manage your resource inventory.

Financial literacy helps

I don’t always read the manual, but for tools that could hurt me or help me in ways I might not foresee, I probably would. I would likely look for security features in a computer peripheral but I take WORD or EXCEL for granted.

With financial literacy, you will be developing knowledge, skill, and the confidence to decide.

Attaching financial literacy to a plan helps you learn to be responsible. The sense of purpose and the observed value of your actions lead to extinguishing ideas like entitlement and victimhood. Having even modest control of your financial life reduces stress.

You’ll still make mistakes, but the process is always evolving. When you have a plan, you can identify mistakes sooner, and understand how to avoid them in future.

Once you get the psychological idea, then there is more

Everyone knows less than they could about the tool-specific details but those are not too hard to find and assess. You can learn enough about tools like debt, investment, risk management and control to improve your life.

Tools are usually sold to you. It is very hard to get super-proficient with tools. Tools are always tactical and tactics have many details and those change over time. For example, how you invest your savings will change as interest rates change. As the risk rises, stocks become less attractive than government bonds, even though the rates of return on bonds may be lower than you like. It is good to buy tools that match your vision and priorities. It is not good to let someone selling a tactic to avoid your strategic vision.

Do-it-yourself is not your friend with complex tactics.

Finding helpers is expensive but it provides value in avoiding situations that could be very expensive and risk-inducing. You must learn enough to be able to choose a tactic from a collection of offerings, but you don’t need to know all the details and how they are changing. Just enough detail to know it will fit with your vision.

The bits to take away

Financial planning works best if your financial literacy skills are adequate.

Start teaching children the psychology part first. If they get the earn-spend save -share -invest idea, the rest will come as needed.

Understand how difficult tog et out of debt will be. If you need ot borrow to get along now, and you make a commitment using future income to make the payments, how will that work?

Invessting is challenging and you should invest a little early. Better to learn your lessons when the amounts involved are small.

I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.

Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.

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