Did you know that April is National Financial Literacy Month? There’s no better time to chat about money management!
What started more than a decade ago as a financial-literacy awareness day is now a month-long campaign Congress recognizes every year. Since its inception in 2004, the program has highlighted the importance of financial literacy and teaches people of all ages how to manage their money wisely.
While it may seem simple, research shows that Americans have a lot of room to improve their financial knowledge. 63% of Americans can’t correctly answer more than three of five basic questions about economics and finance. The Financial Industry Regulatory Authority study included more than 25,000 American adults across all genders, ethnicities, education levels, and ages.
Surprisingly enough, many people understand that they have limited financial knowledge, and it’s stressing them out. 53% of adults are financially anxious, whether it’s about debt, investing, or everything in between.
So why is talking about money and investing with our peers still considered “taboo?” The data shows that we desperately need more financial education, and it all starts with having a conversation.
Let’s look at four ways you can enhance (and embrace) your financial literacy.
Set and Follow a Budget That Works for You
There are many ways to budget, but creating a budget you can actually follow may seem especially challenging. The first step is to figure out what your “normal” is—aka how much money you spend each month right now.
One of our favorite tools to use for budgeting is the 50/30/20 rule. Let’s go through what that means:
- 50% of net income: Spend about 50% of your take-home pay on “fixed costs.” These bills are about the same amount each month, like rent/mortgage, car payments, utilities, cell phone service, gym memberships, or subscriptions.
- 30% of net income: About 30% of your net pay will go toward flexible spending. You may also know it as disposable income or lifestyle expenses. Flexible spending includes costs for hobbies, shopping, and entertainment. While it may surprise you, we put gas and groceries in this category because even though they are necessities, how you spend your money on these things might vary. One month, you might travel, which means you could spend more that month on gas and food.
- 20% of net income: Reserve about 20% of your net income for your financial goals, including paying off credit card debt, saving for retirement, and building an emergency fund.
Manage your habits and change them if needed, so they work for you and your lifestyle. Determine your normal based on your needs and goals; don’t compare it to someone else’s.
Start Saving Now
It’s so easy to put off saving money, especially when you’ll use most of your savings later in life. Things like buying a house, starting a family, sending your kids to college, and retirement all feel like they are light-years away.
Until they’re not.
Then suddenly, you have to try to ‘catch up,’ which is difficult and incredibly stressful. So, start saving for the future today.
Start by investing for retirement and your health in accounts like a 401k, IRA, and/or Health Savings Account. Even if you only have $100 to split between the three, something is better than nothing. However, if you’re thinking of maxing out, there are contribution limits to consider:
- 401k contribution limits: If you’re under 50, you can contribute up to $20,500 per year. If you’re 50 or older, you can take advantage of the catch-up contribution and invest a maximum of $27,000 per year (an extra $6,500).
- IRA contribution limits: Participants under 50 can contribute $6,000 per year, while those 50 or over may contribute up to $7,000 (an extra $1,000).
- HSA contribution limits: If you are contributing for yourself only, you can invest $3,650 per year. Family plans have a contribution limit of $7,300. You can put in an extra $1,000 a year as soon as you turn 55.
Chladek Chats: If debt holds you back from saving and investing, work with your financial planner to find a middle ground. Focus on paying off debt with the highest interest rate first, and work back from there.
Create an Emergency Fund
While you’re working on creating a budget and deciding on where to save, you can’t forget about an emergency fund.
Fewer than 4 in 10 people have enough savings to pay for an emergency that costs $1,000. So, 60% of Americans can’t handle the financial stress of an emergency! Don’t be a statistic and start putting money away now.
Accidents happen. We can make predictions and forecasts, but we don’t know when an emergency will strike. Whether it’s job loss, sickness, or injury, you can be better financially prepared with an emergency fund.
The ideal emergency fund is equal to 3-6 months of living expenses, including house payments, groceries, utilities, and anything else you need to pay for each month.
You don’t need to create and fully fund this account overnight. Set aside a comfortable amount each month for your emergency fund. Once you have a comfy cash cushion, you can allocate that money elsewhere.
Set Specific Financial Goals
It’s never too early, or too late, to set financial goals. Start by having a conversation with your financial planner and hash out the necessary details. Things like where and when you want to retire, pay off debt, build good credit, and create an estate plan are all important financial goals.
You can set yourself up for success with these goals by:
- Maintaining a steady source of income
- Ensuring that you have financial reserves
- Protecting yourself and your family from financial disasters by buying the right insurance for life, health, disability income, etc.
Getting further ahead each year takes patience and planning. If your reserves stay flat, inflation will diminish their value. Stay alert and ready to go after opportunities to grow your money.
When you consider what your personal financial goals are, sort them based on your priorities. Decide which ones are long-term or short-term goals and prioritize them. If you choose goals that you’re enthusiastic about, you’ll be more driven and determined to reach them.
With your 50/30/20 budget, you should be able to distribute your resources in ways that make it possible to reach your goals.
Get Confident with Your Finances
Are you ready to be more self-assured with your finances?
Take the next step to a more confident financial future with our team at Chladek Wealth. We’ll chat about your goals and values and get started on a more secure path. Get in touch with us here.
The contents of this article are for general information and educational purposes and should not be construed as specific investment, financial planning, tax, accounting, or legal advice. Please consult with a professional advisor before taking any action based on the contents of this article. All investment and financial planning strategies involve risk of loss that you should be prepared to bear. We cannot guarantee any investment performance whatsoever, and past performance is not indicative of potential future returns.