In 2004, the U.S. Senate designated April as financial literacy month (I know, I'm a little late!). The President's Advisory Council on Financial Literacy defines personal financial literacy as "the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being."1
However, before you can put your knowledge and skills to work, you need to understand what you want your money to achieve for you and your family over the course of your lifetime. That begins with determining what financial well-being means to you, establishing specific goals and maintaining a clear picture of where you are at any given time along the path toward your goals. Below are six things you need to know to help you remain on track toward your goals at each stage of your financial journey.
- Know how much you’re making, what you’re spending and what you owe. A budget is an important tool for tracking how much money is coming in and how much is going out on a monthly or annual basis. If you’re incurring debt on a regular basis, it’s likely that you’re over spending or you’ve encountered a rocky patch due to unforeseen medical bills, a job loss or other circumstances. Use your budget to help prioritize and manage spending.
- Know your net worth. Your net worth represents all your assets minus all your debts. If you’re managing your budget, your net worth should increase over time as you save, invest and pay down debts.
- Know that all decisions have an opportunity cost. Every financial decision from a $3 cup of coffee to $30,000 car involves a tradeoff. Do you spend the money now on something you want but don’t need, or do you save it? If you need a new car, do you buy new or used? Pay cash, finance over time or lease? Every decision influences your ability to maintain today’s lifestyle goals and tomorrow’s income needs.
- Know your financial goals and your time frame for reaching each goal. The likelihood of reaching your goals depends in part on how well-defined they are and when you plan to achieve them. It’s hard to build a solid plan around a goal “to retire someday” vs. a more finite goal such as, “I want to retire in 7 years and move closer to my children and grandchildren.” The financial planning process can not only help you articulate your goals but measure your progress along the way, so you always know exactly where you stand.
- Know your risk tolerance and the asset allocation that is appropriate for you. Your investment portfolio can help you move closer to your goals but taking on too much or too little risk can sabotage your efforts. Too much risk in a short timeframe can make it difficult if not impossible to recover losses. Likewise, taking on too little risk can jeopardize your ability to outpace inflation over time which can result in falling short of your long-term income goals. Working with a financial advisor to structure an investment portfolio aligned with your goals, timeframe and tolerance for risk can help you appropriately allocate your assets in a manner that inspires confidence.
- Know where to get the help you need. The more you know about your finances, the more likely you are to make clear, confident decisions that support your goals. However, managing your finances can be time-consuming. And the more you accumulate, the more complex your needs tend to become over time. That’s where experienced advisors well-versed in areas such as tax, financial, retirement and estate planning can not only help simplify financial and investment management but provide the information and knowledge you need to make clear, insightful decisions that support your goals at every stage of your financial journey.
To learn more about planning for today’s lifestyle needs and tomorrow’s goals, contact the office to schedule a consultation.