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What is financial literacy? To get to its meaning, we can break down that phrase into the two words composing it. Doing that, we get financial and literacy. So first we look at the word financial and we understand we are talking about money and how money works. And then we come to the word literacy and we believe, rightly, that we are talking about being able to understand something.
Generally, when we hear the word literacy we think of reading and writing. If someone is considered illiterate, it means they do not know how to read or write or that their ability in those spheres is extremely limited. Of course, knowing how to read and write does not mean we can read and write well. It simply means we can perform those functions at a basic level.
Anyway, getting back to financial literacy, it means understanding how money works. However, how money works is an extremely general concept. And in today’s increasingly specialized world, that concept calls for refinement.
Think back to primary school. You might have taken standardized exams, from time to time, that determined your reading level. In fourth grade, for example, if you were a good reader, you might have been graded as having a tenth grade reading level. Depending on reading proficiency, the level of your fellow students might have been graded as higher or lower.
In general, more reading and the willingness to use a dictionary, on a consistent basis, usually led to a better reading level over time. In some cases, teachers had to address the specific reading challenges of some students. Some students needed to take remedial reading to help them improve. Whatever the case, with time and effort, improvement could take place and almost everyone could become a more proficient reader.
A person with a sixth grade reading level might be able to read the local newspaper without much difficulty. However, they might struggle reading Chaucer and Shakespeare.
So back to financial literacy. Much like learning a language, our literacy will generally be in direct proportion to how much we decide to focus on, practice and use that language. Consider please that money has a language all its own. Just how financially literate do we need to be? Hmmm, interesting question. It is kind of like asking how high is up. I will not answer it. That is for you to decide. However, I will suggest that no matter who we are, we should all have basic financial literacy.
By basic financial literacy I mean an understanding of how money works in relation to ourselves, our needs and our desires. More advanced financial literacy might have to do with understanding the acquisition and deployment of money in the context of business.
Basic financial literacy in this context is seen as pertaining to the world of personal finance. I would break this area down into three areas.
Let’s use the acronym MSD here to signify making, saving and deploying money.
Making Money – When it comes to making money, I am referring to the income generated from our professions/primary businesses/jobs. Understanding how to make money means picking a field of endeavor that we have passion for and that is in enough demand to yield a good income. Additionally, we might want to think about continuity when it comes to making money. Is what I have chosen to do something that I can sustain for many years to come?
Saving Money – Refers, generally, to taking some of the money we make, preferably each and every time we make it – as an example, let’s say from a twice monthly check received at work – and putting it aside to grow. When it comes to doing this, we then have to be somewhat familiar with a variety of places we can put that money to grow. We also must understand the risks attached to the vehicles we use to save our money in.
I strongly believe that all money saving vehicles, those things we call investments, have risk attached. I believe this even for those investment vehicles that are touted as risk free. There is always risk. Guarantees go bad. Inflation happens. Things change. There is always risk. However, I feel strongly that there is a greater risk incurred by not programmatically saving and working to grow our money.
Deploying Money – Here I am referring to the money we have saved and are working to make grow. I am not talking about the money from our paychecks that you use to pay a mortgage, rent, medical insurance, food, etc. I am talking about what we choose to do with the money we have in our savings program – our investments.
The things I have mentioned above might seem simple. We might even get a look of boredom on our faces thinking about those things. “Tell me something I don’t know,” we huff to ourselves. Yet, excellence in any field, I believe, is about mastery of the basics.
Too many times we look for secrets to success. Perhaps, just maybe, success is gained through the consistent, persistent, focused application of well honed, basic concepts. In following blog entries, I will focus on MSD and what we can do to get better at it.
In the meantime, if you have a question relating to financial literacy/personal finance, start doing some research and or find a competent financial services industry professional to speak with and gain some insight.
Knowing what to do does not get things done. Doing it does.
Scott McGimpsey September 9th, 2016
This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy. Neither Summit Brokerage Services Inc. nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC