pens, coins, papers

b&b97 It’s financial literacy month! So… how do you know if you’re financially literate?

I feel like people toss around the phrase financial literacy and everyone nods along and says, “Oh yeah, I need that.”

But what exactly is THAT? How do you know whether or not you’re financially literate in the first place? Do you take a quiz? And if so, which quiz do you take? Is the goal to even be financially literate?

In this show, we talk about what financial literacy looks like and also unpack a new phrase that’s cropping up in the financial education sphere: financial capability. It’s not just what you know, it’s how you use it, right? So, to that end, what does financial capability look like? Take a listen and drop us a line in the comments.

Episode Highlights:

Stock options are a pretty common thing to give employees though, and that’s why you hear stories about, like, janitors at Microsoft becoming millionaires for instance. ‘Cause it’s cheaper for the employer to give. It doesn’t actually cost them anything out of pocket, they’re just like “Here’s some options to buy later.” And what that really means is you can compensate an employee by giving them the option to buy stock in the company later at a lower price. That’s what the ‘option’ part of stock option is. You have the option to buy this later at this price now.

It’s like in TV and film, and all that, you have the right of first refusal.

You can’t just memorize a bunch of words, that still doesn’t mean you can read a book.

Just because you understand how compound interest works doesn’t mean it’s compelling enough for you to save more or invest.

Financial literacy is having a certain knowledge base so that you feel like you can make financial decision and move forward with them…so you can make financial decisions, rather than have them be made for you…and the other side of it is knowing when you need to see professional help.

To be financially literate you don’t need to be a financial expert.

You don’t need to know everything to be literate at something…you don’t need to be a mechanic to change your oil….if you know a little bit about it, then you can confidently ask questions to learn more.

The thing about money is it’s not an instinctual thing. Well it’s not a natural thing. And I want to remind people of that all the time because it’s not something that you just should know or not know. It’s very much a learned thing that we constructed in society so we can function in a certain way

Being that [money] is not natural, we will naturally use our natural stuff, our instinctive tendencies, to play with it, and that can get us in trouble when people use their rational minds and are aware of us using our instincts. And that’s how people get played. And it’s not like you’re stupid. And then that makes you afraid.

To really be financially literate…One thing you should understand is how to read a paycheck. So if you’ve never looked at you paycheck before, if you don’t know all the different parts of it, I would take a look and see what comes out. You should see four different taxes come out. You should see federal tax, state tax (unless you live in a state that doesn’t have income tax)…medicare and social security. The other things you should see listed on your paycheck are other things your employer is taking out on your behalf. So things like health insurance comes out of your paycheck, how much is that? Did you sign up for disability insurance or life insurance and didn’t know it? You might be paying for it and didn’t realize it. It will show your 401K contributions or other retirement contributions….also it will show what your employer is contributing to your retirement accounts, because that counts as compensation as well.

The other thing is having a basic understanding of taxes and how taxes work…We hire an accountant to do it, but we understand the general principles of how taxes work. Especially when you’re an employee and taxes get taken out automatically…The financial capability side of financial literacy is, “I found this extra money, and I know what I’m gonna do with it, and I feel confident in this decision.”

The other thing is understanding inflation and how inflation works…things are gonna cost more in the future and every dollar is gonna have less earning power….if you just sit on your money in a shoebox, you will have less money.

After you understand a little bit about earning, now think about spending. So, a lot of spending more has to do with how you deal with money, what your wants and needs are…and understanding, Okay, this is where my money is going. Is this actually where I want it to be going?

What to look for in a bank: Are they treating you well? Are they charging you fees? Is it difficult or easy to bank with them? Understand that you can shop around for a bank.

Looking at your bill. If it went up $5, then why? …Know what your actual monthly bill payments are and what the averages are for utilities and things like that, so if it’s crazy one month than you should look into it.

If you’re not paying attention to the details of what the money is, than the people who are paying attention can take advantage of you and tons of other folks.

That’s the other part of financial literacy: to know if someone is trying to take advantage of you.

One thing is understanding how interest rate and APR works for credit cards.

They’ll have some reasons that sound kinda valid-ish, but in reality they’re just trying to take the most money from the people who pay the least attention.

Choosing not to spend money is different from choosing to save money….saving is an active thing, saving is not a passive thing…saving is a choice.

One of the things about poverty and staying poor is “well I have the money in my hand now so i should get what I want now, because who knows if I’ll have it later.”

To understand saving on the financial literacy tip is to understand how much you’re spending. So, one of the big questions that I always get is how much should you have saved? …and for what?

All of this is of course easier said than done, and all of this is a process. It’s very much a process.

The thing with investing: it feels like this big, wide ocean that you’re just never gonna get all of, and that’s true. There’s so much complexity to investing that to feel like you need to know everything before you start means you’re never gonna start.

Leave everything in there and let it do its thing, and yeah that’s investing.

The last thing is insurance. And insurance doesn’t feel like a financial thing but it very much is. It’s protecting what you have: it’s protecting your assets, it’s protecting your income. And so just understanding the different types of insurance, and what they’re for, and when you need them.

If you know all the stuff but you don’t do anything about it, what’s the use of being financially literate?