How to Become Financially Literate
It never dawned on me how fortunate I am to be financially literate. My family instilled values that gave me the potential to make millions. I knew my community suffered from a lack of financial literacy, but I didn’t know the magnitude until I graduated from college. I started to realize there are literally millions of people that don’t own a bank account, know what a retirement plan is, and splurge money like there’s no tomorrow. What’s saddest is knowing a majority of people don’t care enough to invest resources in helping others in this area. But I do. That’s why I’m writing this piece, specifically for those looking for a way to become financially free, and it all starts with becoming financially literate.
Becoming Financially Literate
There are only two ways to become financially literate. 1) Learning from someone or 2) learning on your own. I’m lucky to grow up in a family that instilled financial values, but that was only the starting point. I have two degrees in accounting, my CPA license, and read several books on personal finance, investing, debt management, and still don’t know everything! Before I get started explaining how to become financially literate, here are several things to keep in mind.
- It’s a marathon not a sprint! You can’t possibly learn everything in a short period of time.
- You get out what you put in. The more you learn (and apply!), the more literate you become.
- Learning financial literacy is like wine, you get better with time.
Now that you have those pointers in mind let’s break down the definition of financial literacy. Understanding what being financially literate means is the first step.
What is Financial Literacy?
Financial literacy is basically understanding how money works. Whether it’s how people invest, earn, spend, finance, or donate money, all of that falls within financial literacy. To take it a step further, it’s understanding that money is a tool that can be used in several ways by gaining knowledge and utilizing it to make better informed decisions. If used correctly, money can protect you (insurance), make you more money (investing), help others (donating), or prepare you for the near future (savings). Now let’s look at how you become financially literate.
Becoming Financially Literate
Remember how I said before there are only two ways to learn financial literacy? If you learned some financial tips from a relative or close friend, great! I hope you’re applying what you’ve learned to get ahead. If not, don’t worry, I’ll put you in the right mindset to get you on your way. My first recommendation is reading a book and it’s called Rich Dad Poor Dad by Robert Kiyosaki. Within the book, the author discusses the lessons he learned from his rich dad versus his poor dad and takes you on a personal journey that has inspired millions. I recommend this book because it inspires you to make money work for you. Having read the book, it’s a great primer as a you dive in the financial world.
My next recommendation will be where I spend most of my time and that is helping you develop an inquisitive mindset. The financial world is quite vast and you can get overwhelmed pretty quickly if you don’t have your thinking hat on straight. Here’s your starting point: from now on, when you hear the words ‘financially literate’ replace it with ‘understand how _____ works’. For instance, if you want to become financially literate in auto insurance, change the phrase to ‘ I need to understand how auto insurance works’. Your end point is to understand that subject as much as possible. The more you understand, the better you will able to utilize it as a tool to better your life financially. Now here comes the hard part.
The Hard Part…
The hard part is the middle point, and the reason it’s hard is because this is where work comes in. In the grand scheme of things, what I’m about to tell you is quite simple and you will get better with time if you stick to it, but I guarantee you not everyone will do it for one of two reasons. 1) You’re a ‘know it all’ or 2) you’re not willing to put in the work. If you fall within one of these categories, the middle point will be the hardest thing you ever done. You ready? Here it is: Ask questions and seek out the answers! Here’s an example, (putting my thinking hat on).
“I want to understand how investing works”
“What is investing? Why do people invest? Why should I invest? Do I use money to invest or can I borrow money from others? How much should I invest? Where can I put my money? What is the difference between a stock and a bond? What is a commodity? Are their any other investments I can make outside of the stock market? How do I research a stock? How do I know if ‘NKE’ is a good stock or not? etc. etc. etc.
If you truly want to understand HOW investing works, you will google search the answers for every question above. The funny thing is, the more digging you do, the more questions you will come up with and the more answers you will need to find. Eventually you will reach a point where you begin to understand a particular subject within personal finance enough to make informed decisions. I just spent some time this past month understanding how I can obtain a personal loan secured by a certificate of deposit. Now I understand all the intricacies of how it works enough to leverage the tool to my advantage.
If you want to became financially literate you must develop an inquisitive mindset. You must have the drive to ask questions and seek out answers. It takes time and dedication to learn this stuff. You reap the rewards by being able to understand the costs and benefits of using each financial tool in your arsenal. What makes financial literacy unique is it’s all relative to an individual’s situation. For instance, if you don’t plan on owning a car it’s not wise to spend your time learning about auto insurance, or the in’s and out’s of negotiating at car dealerships. You may find it more of a benefit to invest time in learning and understanding the financing options in purchasing your first home.
If you want to build wealth you need to know what financial tools are available and how to use them. If you found what I’ve wrote to be interesting, or have read Rich Dad Poor Dad, please comment below. I’m really passionate about this stuff and happy to discuss! If you’re looking for a topic to get started, but don’t know where start here.