Financial literacy: by the numbers

By Elizabeth Morse Read

Whether you’re trying to teach your children good money habits or trying to break yourself of bad ones, April is the time to test your financial literacy.

BACK IN THE DAY, it was fairly easy to keep track of your spending, “do the math” in your head, and set simple goals for planning your financial future. But now, with everything financial being done with the swipe of a smartphone, a click of a mouse, or by relying on automatic deductions and deposits, it’s become too easy to lose track of where your money is coming and going. So here’s a primer on how to get back to basics and take back control of your finances.

Here come the rainy days

Remember your grandparents talking about saving for a rainy day? Putting aside money for emergencies or unexpected bills is just as important now, but studies show that 44% of Americans would have a hard time covering an unexpected $400 expense, like a car repair or replacement eyeglasses, simply because they never squirreled away “rainy day” emergency funds. It requires self-control, but you should always set aside money each month after paying your bills before you spend it on non-essential expenditures like eating out, splurging on the latest fashions, or signing up for yet another streaming service.

Saving for golden years

It’s hard for some to deny themselves immediate gratification in order to put aside money for their retirement years, but it’s a financial discipline that needs to be taken seriously while you’re earning a good income. Your earned income stops when you retire, but the regular monthly bills don’t – and unless you plan on surviving on a very, very frugal lifestyle for the remainder of your years, you need to create serious financial plans now. Unfortunately, the median “nest egg” for US households amounts to a little over $5000 – how long would that last?

Some people have been able to sock away retirement money in IRAs and pension plans, and everyone can expect regular Social Security benefits upon full retirement age, but in 2018, the maximum monthly payment from Social Security was $2,788, and most people got much less than that. Consult with a reputable retirement planner to figure out how much you’ll need to save every month now in order to supplement your pension and projected Social Security payments later.

Neither a borrower nor a lender be

Thrifty Yankees loathe being in debt, yet according to the Federal Reserve, US household debt levels have risen to almost the same levels seen just before

the Great Recession! It’s just too easy to borrow too much and end up paying high interest rates. With the median household income less than $60,000, the average US household has over $15,000 in credit card debt – in addition to car loans, student loans, and mortgages – and all that money paid on interest is enough to swamp anyone’s well-intentioned plans to save for rainy days or retirement.

Shop around for car loans and mortgages, rather than being lured in by “only $100 per month!” deals. Remember that the longer the term of a loan, the higher the interest costs over time. Resist the temptation to use credit cards for non-essential purchases and try to pay off as much as possible each month, rather than falling into the trap of making only minimum monthly payments – it will take you years longer to pay off those debts if you do.

Credit watch

Nothing is as important in your financial life as having a solid credit rating – if employers, landlords, or governmental agencies consider you a credit risk due to lapsed bill-paying, tax issues, or loan defaults, your entire future is on the line. If your credit rating is poor, you won’t be able to get a loan. If it’s only fair, you’ll have to pay a higher interest rate. But if your credit rating is good-excellent, you’ll be much better able to qualify for better interest rates and loan terms.

You can review your credit score for free every year by visiting annualcreditreport. com. You’ll see what the three major credit bureaus – Equifax, Experian and TransUnion – are reporting about your financial status. And if you find any errors in their reports, you can challenge them to furnish correct and complete information because of the Fair Credit Reporting Act (FCRA).

Set financial goals

When your life is in financial chaos, it may seem impossible to see your way clear of debt or a bad credit rating. Set short-, mid-, and long-term financial goals that are realistic and manageable. For instance, if you decide to pay down your highest-interest credit card debt within two years, then set up a monthly budget that sets aside money specifically for that purpose (and stop using that credit card!). Not only will that pay down the debt, save you the long-term interest payments, but it will gradually help improve your credit score.

A mid-term financial goal may be to put aside money for a deposit on a new house within five years. Again, set aside money specifically for that goal and be patient. A long-term goal would be to set aside funds for a child’s college costs or your own retirement.

This all presupposes that you’re disciplined about managing your monthly income in order to achieve your goals. Pay your monthly fixed costs religiously and on time (mortgage/rent, insurance, car loan); be prepared for periodic expenses (car registration, excise taxes, etc.); and carefully calibrate your variable monthly

Nothing is as important in your financial life as having a solid credit rating

expenses (utilities, groceries, gasoline, cable/phone/internet, heating). Keep track of and curtail your non-essential spending – restaurants, entertainment, vacations – and use those pay raises, tax refunds, inheritances, and annual bonuses to bulk up your dedicated savings accounts – rainy-day funds, retirement savings, and those short-, mid-, and longterm financial goals.

The taxman cometh

Keep abreast of any significant changes in the tax laws, as they can greatly affect your tax liability come April 15 each year. Back in the 1980s, when the motto seemed to be “leverage to the max!”, you could deduct the interest charged on your credit cards, just as you do the interest on your mortgage, and you could also “income average” over five years to lower your taxable income on a given year. But such tax breaks were phased out, leaving consumers with heavy credit card debt in a budgeting pickle. Speak with your accountant about how to best prepare for such annual changes in the tax laws, and start keeping a tax-receipt folder to maximize your deductions.

Down the drain

In 2016, Americans paid $15 billion to banks in overdraft fees – and that doesn’t even count additional maintenance fees or interest on loans. Do some research to find a bank or credit union that offers free checking and overdraft protection by deducting from your savings account instead of paying overdraft fees. Avoid paying ATM fees every time you need cash by identifying which ATMs are within your bank’s system. And never use alternative financial services like payday loans, rentto-own stores, or pawn shops – you’ll pay a steep price over time for using them. If you don’t read the fine print, your monthly income could be hemorrhaging dollars every time you miss a deadline or forget to opt out of a rarely-used subscription, membership, streaming service, or app. Beware of 0% interest or teaser-fee credit cards – if you make just one payment late, the interest will balloon to mind-numbing heights.

Good recordkeeping

It may seem like a lot of busywork at first, but tallying up receipts and highlighting expenses on your bank/credit card statements will not only help you out at tax time, but will also give you much-needed insight into your spending habits. Automatic deductions for services/products you don’t need or use, recurring splurge spending at the beginning of the month or increased use of your credit cards at the end of the month all add up to money down the drain.

Be more mindful about how much wasteful spending and poor planning is sapping your budget and preventing you from reaching your financial goals. Take care to spend your hard-earned money on what you need, whether now or in the future, rather than on what you want (or can’t resist on the spur of the moment). A penny saved is a penny earned.