Understanding credit, savings and investment will help you build wealth
Knowing enough about money to cover your bills is a start, but it is not enough financial literacy to provide long-term security. Most of us eventually wonder what else we should be doing – and whether what we do not know could hurt us.
“When you have a blind spot, you do not realise until something blindsides you,” says Mark DiGiovanni, a certified financial planner in Georgia.
Identify the gaps
Self-assessments, personal finance books and websites can help shine a light on what you do not know.
Financial counsellor Bret Anderson of Colorado has spent much of his career helping incarcerated veterans get back on their feet and has also advised high-wealth clients. He says five things frequently predict who will manage money successfully. Two habits – saving and investing – are crucial, he says. Good money managers also know how credit works, have a plan to build wealth and pay off debt, and know what passive income is and how to create it. If anything on that list is unfamiliar to you, that suggests a starting point for research.
“There are plenty of resources just a Google search away,” says Heather Winston, assistant director of advice and financial planning at Principal Financial Group.
Nail the basics, then keep learning
Before you add complexities, be sure you are:
Saving: it is an essential habit
Budgeting: if you do not have a formal budget, check online for help in creating one
Planning for emergencies: you cannot prevent unexpected expenses but an emergency fund, excellent credit and insurance can keep them from denting your finances.
Next, protect your money and access to credit. Here is how:
Check your credit scores and reports Mr Anderson suggests Lenders and potential landlords or employers may see those, so it is smart to know what is there. In addition, a big swing in your score or an account on your credit reports you do not recognise could suggest identity theft.
Keep your identifying information safe and practise good cyber hygiene
That means avoiding public Wi-Fi, being careful about what you post on social media, not opening email attachments or links you were not expecting and using strong passwords. Consider freezing your credit to reduce the likelihood that you will be victim of identity theft. Set alerts on your credit card account to let you know when they are used.
Learn to recognise fraud Fraudsters try to create a sense of urgency so that you pay first and think later. They know how to make phone, email or text communications seem real. Pause before acting, independently confirm the contact information and initiate communication. No one legit asks for payment by gift card or prepaid debit card.
Set goals for yourself and remember that those are personal
“One of the most critical lessons to learn is to stay focused on your needs, not on what someone who does not know you, your goals or your life is saying,” says Mr Winston. Consider working with a fee-only, fiduciary financial planner or a financial coach for help with identifying your goals.
Avoid overconfidence
If you have had some success investing in a bull market, you might not be an investing genius. Feedback from a professional may help you decide whether you were smart or lucky, says Mr DiGiovanni.
Help your children become financially literate
Put guidance in language they understand, Mr Anderson says. Help children see how money is relevant, he suggests. Allow them to see how you make financial decisions, then let them make a few of their own.
Learn as needed
You do not need to become a walking financial encyclopedia. There are things you may never need to know or that you can learn when they become relevant. Examples include:
Financial consequences of big life changes, such as marriage, divorce, parenthood or retirement Refinancing a mortgage Rent vs buy decisions Saving for college Mandatory retirement withdrawals
Don’t wait
While no one wants to make a mistake, the costliest one may be waiting until you have “extra money” or feel more confident about financial decisions. The sooner you start, the more interest can grow your wealth.
“Every day you postpone is another day you will have to work,” says Mr DiGiovanni.