Financial Planning Insights
Nine Topics to Know for Financial Literacy
6 minute read time
I’m writing this article as a son, a parent, and a wealth advisor:
- As a son, I saw my own parents struggle later in life when a debilitating illness led to severe financial stress—much of which could have been prevented by financial planning earlier on.
- As a parent of three teenagers, I want to help them launch into adulthood unburdened by misunderstandings about money.
- As a wealth advisor, I often hear from clients about what they wish they knew earlier on.
Benjamin Franklin once said, "An investment in knowledge pays the best interest." This short article won’t give you all the knowledge you need, but it will give you a sense for important topics to learn about over time.
As you do, be sure to look beyond what you see and hear on social media. There’s plenty out there about personal finances … and not all of it will lead you toward confidently making decisions that support your life goals and, ultimately, to a sense of financial freedom. Over time, you’ll benefit as you establish relationships with advisors who gain a clear picture of what is important to you—and why it is important to you.
1. Planning: Why do I need a plan?
Life is full of surprises. With an estimated 60 life transition events to navigate, from buying a car to getting married and retiring, it's essential to have a plan in place. Like a GPS for your financial journey, a comprehensive plan helps you stay on track. As I said at the outset, I’ve seen firsthand the painful realities of delaying the planning process. But planning isn’t just about avoiding negatives. It's about identifying positives and having an action plan to take advantage of them.
2. Budgeting: How can budgeting help me live my best life?
Budgeting allows you to be in control of your money. Budgeting is the process by which every dollar is assigned a purpose. It gives you confidence in your spending—from entertainment to buying your first home. You'll know where money is going and be able to make adjustments that align with your goals. It gives you awareness, for example, about whether many small subscriptions are actually adding up to a bigger figure than is comfortable.
3. Student loans: How do I make smart choices about student loans?
Student loans can feel like a maze. Understand your funding options and repayment criteria. The average college student has tens of thousands of dollars in student loans, making them a huge factor in their financial lives—both during and especially after college.
4. Credit and Debit Cards: What's the difference between credit and debit cards, and how can I use them wisely?
Both credit and debit cards offer convenience—but are very different from one another. Credit cards can help build your credit score if used responsibly, while debit cards keep you in check by using only the funds available in your bank account. Master the use of credit cards by understanding interest rates and rewards; make a commitment to pay off your balance every month (here’s where budgeting comes into play). Not all debt is bad—but credit card debt usually is. If you get in over your head, attack it head-on with debt management strategies like the snowball or avalanche methods.
5. Credit Scores: Just what are they, exactly?
Your credit score is like a financial report card, and it plays a huge role in your financial life. Your score factors in your payment history, credit utilization, length of credit history, types of credit accounts, and recent credit inquiries. All of these work together to provide a snapshot of your financial trustworthiness. Know your score—you can access it for free online—and work to build and maintain a high one.
6. Own vs. Lease: Should I buy or lease a car, and should I rent or own a home?
The decision to buy or lease a car, and whether to rent or own a home, depends on your unique financial situation and lifestyle preferences. You need to consider factors like your budget, long-term goals, and the pros and cons of each option. Big purchases require close attention—and all the small decisions you’ve made along the way help get you get ready for these big ones. You need to know yourself and what’s important to you.
7. Workplace Benefits: What’s important and what’s not?
Make sure you contribute to a workplace retirement plan at least to the level of any employer matching funds. Otherwise, you’ll be leaving money on the table. Understand your options when it comes to other benefits, too—especially health insurance. You may have an opportunity to participate in a high-deductible plan matched with a health savings account (HSA). Contributions into an HSA are pre-tax, meaning your medical spending will go much further here than through normal post-tax spending.
8. Investing: How do I start … and does it have to be right now?
The key to investing is understanding the power of compound interest. Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … He who doesn’t … pays it.” As a younger person, time is on your side. But you have to start! A good place is your workplace retirement plan. Small is fine…but be disciplined, be consistent, and think long-term. Pay yourself first.
Investing is simple but not easy. I particularly like this quote from financial writer Nick Murray: “All successful investing is goal-focused and planning-driven. All failed investing is market-focused and current-outlook-driven. All successful investors act continuously on their plan, while all failed investors react continually to the markets, and always the wrong way."
9. Taxes and Insurance: What do I need to know?
To again quote Ben Franklin, “In this world nothing can be said to be certain, except death and taxes.” Taxes are unavoidable—but you can and should take steps to minimize them, such as through qualified retirement plans. Over time, build your understanding of the basics of how the tax code applies to you, such as your tax rate and the benefits of tax deferral and tax-free growth.
It’s tempting to think of insurance as a waste of money, because it’s something you hope you’ll never need. But protecting your assets is vital. Sometimes, it’s required—by law, when it comes to your car, and by mortgage companies, when it comes to a house. Other insurance isn’t required but can be fundamental to financial plans; a good example is disability coverage, which may or may not be available through your employer.
Events that are less likely to happen yet would have a significant impact if they do—for example, if your house burns down or you become disabled—are risks we should consider addressing through insurance.
Wrap-up: Why should I care about financial planning at such a young age?
Financial planning may seem daunting but taking the time to learn the basics and putting a plan in place can bring a sense of freedom and security. By starting early, you're giving yourself the best chance to avoid the pitfalls that can come from a lack of preparation. You’ll also bring confidence and resilience to life's transitions.