There are many things in life we become experts at. Most of us strive to learn everything we can about our jobs in hopes of advancing our careers. But we also can become experts through our hobbies, interests, and even in our roles as parents, spouses, and friends.
Yet, one area that so many people choose to ignore is finances. For whatever reason, we assume that it’s something that’s too complicated or beyond our capacity.
This is evident when you consider that currently 32 percent of Americans are not invested in the stock market. Why is this? According to Bankrate’s chief financial analyst Greg McBride, CFA, it’s because they don’t understand stocks.
This goes above and beyond just investing. When it comes to more general financial habits, nearly two-thirds (64 percent) of Americans are also living paycheck to paycheck – simply because they don’t know any better or how to change their ways.
Fortunately, it doesn’t have to be this way. Money can be demystified if you spend some time learning about it from books, podcasts, and videos. In this post, I’ll share seven reasons why financial education is so important and why you should be striving every single day to learn something new about money.
1. Stay Out of Debt
While many people attribute debt to poor spending habits, it often has more to do with a lack of understanding about how loans work. For instance, a few months of making regular charges to a credit card and then only making the minimum payment is all it takes to rack up a few thousand dollars in interest. And the longer that gets left unchecked, the more it can spiral out of control.
The financially educated can avoid debt by not only learning more about how loans work but also how to insulate themselves from such situations. One of those tools is to build an emergency fund. By having 3 to 6 months’ worth of living expenses ready on hand, you’ll be prepared to handle just about any unplanned event or miscellaneous bill that comes your way.
2. Higher Growth Potential
Back in the days of our parents, it used to be possible to put your money in the bank and get a decent rate of interest. However, with bank interest rates barely paying anything, savers need to broaden their strategies for greater long-term growth. In particular, they should look to the markets and get comfortable navigating how they work.
Don’t worry about picking individual stocks. There are dozens of great products like index funds and broad-based ETFs (exchange-traded funds) that are designed to help optimize your portfolio for less risk and more return. Additionally, it will also be important to recognize the impact of fees, how they can eat into your profits, and what you can do to minimize them.
3. Avoid Paying Unnecessary Taxes
Speaking of portfolio growth potential, one thing that can really hamper your progress is taxes. Taxes are owed on any income you receive in a given year. However, what’s interesting is that depending on how that income is received or used, you might be able to reduce your tax bill substantially.
The tax laws are written with lots of exceptions, loopholes, and other clauses. For instance, investors who receive their income through capital gains and dividends will pay a lower tax rate than people who earn their money through a traditional job.
A strategy that nearly everyone can use is to utilize their tax-advantaged retirement plans such as a 401k and IRA. These plans have special IRS privileges that let you deduct your contributions from your taxable income. Given that most people fall into the 22 to 24 percent brackets, this means that they’ll save $2,200 to $2,400 for every $10,000 placed into these accounts.
4. Save Yourself from Financial Predators
There is no shortage of financial salesmen ready to sell you something. Sometimes they may reach out to you directly with a product or service, or sometimes you may be enticed by their presence on social media and sign up for one of their courses. In most cases, the claims they make and the ideals they try to sell you are all just a scam designed to prey upon your desires.
The financially literate understand what’s possible and what’s not. They know how to separate fact from fiction and can stop these predators dead in their tracks.
In addition, they also know that 99.9 percent of what a person needs to know to be successful with money can be found online or in books for free. Don’t waste your time or money paying other people for what you can do for yourself.
5. Adds Value to Your Life
By educating yourself in the ways of good financial management, you’ll do more than just save a few dollars every month. Over time, you’ll be able to do the things you really want with your money and time:
- Travel
- Start a business
- Support causes you believe in
- Etc.
It all starts with learning how to budget and keep your finances under control.
If you’re not keeping track of your money already, then try using a helpful app like Buxfer. Buxfer automatically connects to all your financial institutions and automatically imports all your transactions into one condensed dashboard. This data enables you to keep track of your spending so that you can make sure that no category within your budget is exceeding the limit you’ve set.
6. Teach It to Others
It’s often been said that people who practice good financial management learned it from someone else – most likely their parents. This is true of most self-made millionaires.
Parents who know money are better able to teach their children:
- The importance of saving a nest egg
- How to invest for growth
- Good budgeting
- How to avoid debt
- The value of building good credit
In other words, not only will you benefit from what you’ll learn about money, but your entire family will too.
This is how some families have created wealth that spans across generations. The more that one contributes, the longer the legacy lives on.
7. Take Control into Your Own Hands
When you understand how money works and start taking steps to build your net worth, it’s like a door to a whole new world has been opened. You no longer have to feel the pressures of debt or like you’re a slave to your paycheck. You’ll realize you have options and the possibility to live your life as you see fit. In other words, financial education will be the beginning of your path to financial freedom.
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