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Retire On Your Terms | Financial Literacy

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Updated:  March 8, 2020

 “If you have $1 in your bank account on the day you die, you had more money than you needed in your lifetime to live.”

This quip brings perspective and can reinforced one extremely important aspect of retirement: ‘putting together a plan and sticking to it’ is vitally important.

Life is unpredictable, so any plan you make for retirement has to be flexible and you must accept the undeniable fact that you can’t control everything life delivers can afford personal freedom and peace of mind in retirement.

Retirement is a great time to discover new passions and interest by taking classes, finding one-on-one instruction, or joining groups and organizations. The key to a happy retirement isn’t how much free time you have, it comes down to how well you’ve planned for retirement and how you manage whatever free time you have.

There is adage in business management…‘you can’t manage what you don’t measure’. This adage is true for business management, and is also true for personal finance and retirement. You cannot manage your personal finances or your financial readiness for retirement unless your measuring your current financial status and progress.

It is important to measure those financial activities or results that are important to successfully achieving your personal financial goals. The time to plan for retirement is now. Planning for retirement starts with having a ballpark idea of longevity and how much money you will need in retirement. Yet, many Americans are not financially prepared or have planned for their post-working years. Only 54 percent of non-retired respondents to the FINRA Investor Education Foundation’s National Financial Capability Study (NFCS) said they have some kind of retirement account.

42% of Americans have saved $10,000 or less for retirement

This statistic suggests a significant number of Americans aren’t on track to meet their retirement goals. That shouldn’t be surprising given the plethora of potential obstacles: Pensions are less common and health care costs continue to skyrocket higher. Additionally, you may need to figure out how to put your kids through college, but you might be paying off your own student loans or credit card debt at the same time.

If you’re off track, you can take a few simple steps to get right back on the road.

  • Save as much as you can, as often as you can. If you’re years away from retirement, you’ll likely benefit from the compounding effect.
  • Stay in the workforce longer (more on that in a moment) or decrease your living expenses. This may be an especially viable option if you’re close to retirement.
  • Plan and focus on what you can control and what’s important to you—planning provides perspective on what you can do to meet your goals
  • Financial experts advise that equities need to be a larger portion of retirees’ portfolios during retirement for several reasons including longer life expectancy and lower interest rates.

Retirement readiness is achievable by most Americans. But, it requires that Planning and being financially prepared for retirement become a key priority for American families. Yet, research reveals that a majority of Americans are not confident they are financially or emotionally prepared for retirement. Additionally, only about one third have an actual plan in place. Nearly a third worry they will outlive their retirement savings and many already plan to work part time during retirement.

Longevity

Use the Social Security Administration’s Life Expectancy Calculator to help determine how many years of retirement you might need to plan and save for. As a rule of thumb, a retiree should expect to live thirty (30) to thirty-five (35) years in retirement.

How Much Money

Many retirement experts estimate you’ll need between 70 and 85 percent of your pre-retirement income to maintain your standard of living after you stop working. But that formula might be too simple, and possibly too low, to account for what you’ll actually spend. For instance, you may require more if you have expensive hobbies or plan to travel a lot. You may also need more if you or your spouse are in poor health and have substantial medical expenses.

Retirement Planning

Only 1 out of 10 workers has prepared a formal financial plan

Without a plan, you may be more prone to react to market events, and you might even make rash decisions. A plan provides perspective, brings clarity to your current situation, and shows you how to make changes to your spending and saving habits. It can give you knowledge to accept responsibility for your life and the confidence to address the unknown and market volatility.

Retirement Planning Requires a Plan

 “The goal of retirement planning is to create a plan. It feels silly to come out and say that, but from what I’ve seen, most investors never actually take the step of creating a concrete plan. Instead, they read a few articles about various retirement planning topics and they leave it at that. (And many investors don’t even do that much.) The more specifically you’ve planned how you’ll manage your portfolio — and your finances in general — the less likely it is that you’ll have to go back to work or dramatically reduce your spending later on in retirement.” Mike Piper, Can I Retire? How Much Money You Need to Retire and How to Manage Your Retirement Savings, Explained in 100 Pages or Less

Individuals have to take responsibility for their financial security after retirement. Unfortunately, the majority of Americans do not appear to have done much retirement planning. Forty-one percent of FINRA Foundation NFCS respondents have tried to figure out how much they need to save for retirement, while 54% have not. The act of planning for retirement has proven a strong positive indicator of retirement wealth.

When putting together a retirement plan, goals “must-have” essential expenses should take precedence over “nice-to-haves” or discretionary expenses.

Workers who were able to retire by choice were happier than ones whose retirement was thrust on them: 69 percent of the retirees who retired by choice were satisfied with their lifestyle but only 36 percent pushed into retirement said they were satisfied.

The happiest retirees are engaged in some kind of meaningful activity or actively employed, are in good health and are more connected in the physical world. In short, activities and social engagement are good for a retirees health and wellness.

The happiest retirees “eat well, sleep soundly, play often, exercise at least three times a week and maintain strong social connections. The happiest pre-retirees and retirees believe “good health” as the No. 1 key to happiness in retirement.

Save smart in accounts earmarked for retirement.

Whenever possible, use tax-advantaged savings accounts like 401(k)s to save money on taxes and boost retirement security. Contributions to a traditional 401(k) are not subject to income tax withholding and are not included in your taxable wages—and earnings on Roth 401(k) contributions are tax-free. In 2020, contribution limits increased, so you can contribute up to $19,500 to your 401(k)—and if you’re aged 50 or over, you can contribute an additional $6,500 for a total of $26,000.

Any day is a good day to start, or increase, your retirement savings and investing, and step up your planning. Understand that saving and crafting a plan for retirement is a long-term process.

References:

  1. *https://money.cnn.com/2018/03/16/retirement/average-retirement-savings/index.html
  2. http://fortune.com/2018/04/18/americans-save-less-than-10000-for-retirement/
  3. The National Financial Capability Study (NFCS) is a project of the FINRA Investor Education Foundation (FINRA Foundation).
  4. https://www.retireonyourterms.org/about-us
  5. https://vanguardblog.com/2018/11/08/financial-worries-start-planning/

Set up an Emergency Fund

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Key Takeaways

    A typical emergency fund target covers three to six months of expenses 
    Keep an emergency fund separate from long-term investments
    Include emergency savings as part of your budgeting process

Save for emergencies.

To keep from dipping into long-term investments or borrowing at unattractive rates when you need cash in a hurry, create an emergency savings fund that can cover at least three months of essential living expenses such as rent or mortgage, utilities, food, and transportation.

An emergency fund isn’t just a repository of cash you can dip into when the tires wear out or the dishwasher breaks down. Those emergency dollars may actually be critical to your overall investing strategy. The general rule for emergency savings is three to six months’ worth of expenses.

It depends on personal lifestyle, career, and income. If income is a little more stable, maybe they can stick to something shorter. But if the situation is unstable or if they’re in a profession where maybe there’s risk of attrition, then they may want to have a longer type of fund set up.

the availability of emergency cash is the key short-term priority, because without it, longer-term goals could get dinged.

Financial experts advise to put financial goals into short-term, intermediate-term, and long-term buckets. The short-term budget would include emergency savings. Intermediate goals may include buying a house and paying for college. But, the Long-term goal is retirement. But intermediate and longer-term buckets can spring a leak if emergencies aren’t covered by short-term funds.

References:

Developing Good Financial Habits

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“It’s not the big things that add up in the end; it’s the hundreds, thousands, or millions of little things that separate the ordinary from the extraordinary.” Darren Hardy, author of The Compound Effect

Financial planning in small steps doesn’t take large sums of money to start.  In fact, financial planning can have a profound impact on financial security for Americans, especially lower-income households, by helping people improve their saving and budgeting habits. A written plan helps savers prioritize their goals and provides a way to measure success.

A disciplined, steady approach to saving, investing and ruthlessly managing spending wins out. Wealth-building habits don’t involve a get-rich-quick scheme —it is a slow, gradual process to accumulate wealth,” you must be persistent and consistent.

Savings habits

“The real cost of a four-dollar-a-day coffee habit over 20 years is $51,833.79. That’s the power of the Compound Effect.” Darren Hardy

While investing may appear at times to be complicated and risky, saving is pretty straightforward. Two-pronged approach to increase the saving amount:

  • Generate more cash inflow.
  • Reduce cash outflow.

Spending and saving often go hand in hand because whatever you don’t spend is potential savings. That’s why it is important to focus on buying things that will hold value or appreciate in value instead of allowing expenses to eat into savings through continuous consumption. To accumulate wealth, it is critical to manage expenses tightly. Instead of living just within your means, it is important to live below your means.

One way to reduce outflow is to maximize tax savings through retirement plans such as the 401(k). Another is to pay off debt and prioritize by paying the debts with the highest interest rate first.

Keep an eye on the prize

“There is a one thing that 99 percent of “failures” and “successful” folks have in common — they all hate doing the same things. The difference is successful people do them anyway.” Darren Hardy

Following the adage that it becomes easier to reach your destination or to achieve a successful outcome with an end goal in mind. Those who gain wealth believe that everything they do is ultimately done to fulfill their financial goals. For example, people should set a “retirement number” and a deadline for reaching that number. That number is the goal for how much cash and investments they need for a comfortable retirement and the deadline is the date to achieve the goal. Every time you put money toward saving, you’re a step closer to the prize.

Set It, But Don’t Forget It

Setting up an automated savings and payment system is one habit highly successful people practice to keep their financial house in order. They automate their savings, investing, bill payments and money transfers. But they don’t ‘set it and forget it’ once they set up the automated system. They know it’s important to maintain awareness and manage regularly, at least weekly, where their money’s going.

Automatic saving and investing

People have to be consistently reminded that to develop habits of saving and investing. The more you do develop the habit of saving and investing for the long term, the easier it will become. Consequently, it is recommended to set automatic savings protocols, if necessary, so a portion of your earnings goes directly from your paycheck into a separate savings account.

Habitually and automatically save 10% to 20% of every paycheck.

References:

  1. https://www.bankrate.com/finance/investing/financial-habits-of-wealthy.aspx
  2. https://jamesclear.com/book-summaries/the-compound-effect

The Wealthy Next Door

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To accumulate wealth, you should start by reading and studying the behaviors of people who have successfully accumulated wealth and achieved financial independence.

In the groundbreaking financial book, “The Millionaire Next Door: Surprising Secrets of America’s Wealthy”, written in 1996 by William Danko and Thomas Stanley, found that people who appear wealthy may not actually be wealthy.

Their findings reveal that people who appear wealthy tend to overspend or live paycheck to paycheck. They often overspend on symbols of wealth like luxury vehicles and large homes — but actually have modest or negative personal net worths. On the other hand, wealthy individuals tend to live modestly in middle-income communities, drive modest vehicles, and shop at Costco Warehouse.

Lessons Learned from “The Millionaire Next Door” are enlightening on how the wealthy actually spend and save. Instead of appearing to be wealthy, they tend to:

Understand that Income Does Not Equal Wealth

It is a fact that higher-income households tend to have more wealth than lower- and middle-income households. But the size of a paycheck explains only approximately 30% of the variation of wealth among households. What really matters is how much of the income is not spent on discretionary things, but is saved and invested. On average, wealthy individuals invest nearly 20% of their income. And, it finds that those in the top quartile of wealth accumulation are prodigious accumulators of wealth (PAWs), according to Danko and Stanley

Work with a Budget

The majority of wealthy individuals have a budget. Of those who don’t, they have what the authors called “an artificial economic environment of scarcity,” more commonly known as “pay yourself first.” In other words, they invest a good chunk of their income before they can spend any of it. As the authors wrote, “It’s much easier to budget if you visualize the long-term benefits of this task.”

Manage their Spend

Nearly two-thirds of the wealthy can answer know how much their family spends each year for food, clothing, and shelter. In contrast, only 35% of high-income non-wealthy answered yes to this question. The wealthy manage and track their spending.

Have Defined Financial Goals

About two-thirds of wealthy have clearly defined short-, intermediate- and long-Term goals. Many of the wealthy are retired and have already reached their goal of financial independence.

Dedicate Time To Financial Planning and Education

Creating a budget, goal setting and financial planning all take time, but the wealthy were willing to spend it. Danko and Stanley found that people they labeled “prodigious accumulators of wealth” (PAW) spend many hours per month planning their investments. In fact, they found “a strong positive correlation” between investment planning and wealth accumulation. Each week, each month, each year, the wealthy plan their investments.

Buy and Hold Smaller Homes

Your purchase of a home — and how often you choose a new one — will determine your ability to accumulate wealth. According to The Millionaire Next Door, that wealthy family has been next door for quite a while. Half of the wealthy have lived in the same house for more than 20 years.

Stay Married

The majority of wealthy people are married and stay married to the same person. Several studies have shown that people who are married accumulate more wealth than those who are single or divorced. Conversely, it’s important to partner with someone who possesses similar healthy financial behavior and habits.

Buy and Hold Pre-Owned Vehicle

The majority of wealthy individuals own their cars, rather than lease. Approximately a quarter have a current-year model, but another quarter drive a car that is four years old or older. More than a third tend to buy used vehicles.

Live Happier Lives

Bottomline, living below your means is the one sure way to accumulate wealth and to live happier. Since, there exist a peace of mind living below your means and saving money. Danko and Stanley’s research indicates that, “financially independent people are happier than those in their same income/age cohort who are not financially secure.”

Essentially, when it comes to financial security and retirement planning, adopting the lifestyle of the wealthy means you can save more toward your financial goals and destination. That’s a formula that can help anyone to accumulate wealth and achieve financial independence.

  • References:
    1. Thomas J. Stanley, and William D. Danko, The Millionaire Next Door: The Surprising Secrets of America’s Wealthy Paperback, November 16, 2010
    2. https://www.getrichslowly.org/nine-lessons-in-wealth-building-from-the-millionaire-next-door/

    Positive Mindset: Key to Financial Success

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    “If you know the enemy and know yourself, you need not fear the result of a hundred battles.” Sun Tsu

    In America, we have a spending problem. Inherently, we desire to drive the latest luxury vehicle, wear the most elegant fashions and go on the most extravagant vacations, whether or not we can afford them. On top of this, the entertainment media and lifestyle advertisers actively encourage the conspicuous spending and consumption which compounds the financial woes of American society.

    Schwab Wealth Survey

    According to a Charles Schwab 2019 Modern Wealth Survey, “more than a third of Americans admit their spending habits have been influenced by images and experiences shared by their friends on social media and confess they spend more than they can afford to avoid missing out on the fun.” The survey examined how a 1,000 Americans think about saving, spending, investing and wealth.

    Survey respondents tended to place the blame on social media platforms and not people, “ranking social media as the biggest “bad” influence when it comes to how they manage their money, while they put friends and family at the top of “good” influences.”

    According to the survey, “three in five Americans pay more attention to how their friends spend compared to how they save, with an equal number saying they’re at a loss to understand how their friends are able to afford the expensive vacations and trendy restaurant meals they portray on social media.”

    Furthermore, the survey finds that “the pressure to spend as a result of social media envy and the desire to not be left out of friends’ experiences is particularly acute among Generation Z and millennials.

    Financial Mindsets

    These financial mindsets are derailing the financial lives and future on millions of Americans wanting to keep up.

    “The keys to financial security and success are simple to achieve by every American.  The keys involve preparing a simple financial game plan, developing the correct financial mindset and implementing positive financial habits and behaviors…period.

    “A ship without a rudder can certainly make its way across the water, but it has no control of where the water will take it–so grab your rudder and take initiative of your financial destiny.” Nancy LaPointe

    Creating a game plan is a critical initial step in taking control of your financial future.  A simple financial plan allows you to get control of your financial future.

    Financial Planning

    “Everyday, you must believe and have faith in your ability to achieve financial security by following a few simple key financial concepts.”

    Money is rarely about money. Money is all about your habits, your thoughts and your behaviors. Your habits, thoughts and behaviors about money determine your current and future financial destiny…how you spend, save, invest and accumulate wealth.

    Financial mindset is a predetermined set of beliefs about money, spending, saving and investing. We all have them. Even if you can’t verbalize what your mindset, it’s still present both consciously and unconsciously. Some common money beliefs are ‘life’s all about what you own‘, ‘retirement is far away‘, and/or ‘my financial problems are _______’s fault‘.

    It’s important to take time to identify what your financial mindset is. Because your financial mindset will either help you succeed financially or it will hold you back. And it’s not enough to just label old financial mindsets as false, you have to replace them with a new positive mindset.

    Here are four common financial mindsets with the best replacement options:

    1. Your life is about what spend and own vs Your life is about purpose, goals and priorities

    Americans are consumers and driven by the “fear of missing out” and ‘keeping up with the Jones’. We’re easily caught up with what’s new, next, and just beyond our price range. But this cycle of constantly upgrading is hurting our financial life. Cutting your dependence on things is vital. Learning to live a life of purpose and setting financial goals and priorities that realizes it’s okay to own an older model vehicle and phone. Doing so will make your financial life a lot less complicated.

    2. Saving money is for people who have extra vs Understand the importance of an emergency fund

    Financial success boils down to spending less than you earn. It’s really simple. But people often spend every penny they make which doesn’t leave room for error in the future. Emergencies happen and this is how debt happens, so it’s important to tune your mindset to a saving mindset. Living below your means and saving a portion of your income not only lessens your dependence on your income but it also prevents you from going into debt in the future. Your first goal is $1,000. From there, work up to three months worth of expenses.

    3. I can afford the payment vs I don’t want to incur debt repayments

    Being able to afford the payment doesn’t mean you should afford the item. Making the phrase “I don’t want to incur debt repayments” an every day part of your life will prevent unplanned spending. It will also foster a mindset of spending less.

    4. Someone/Something is to blame vs Accepting responsibility for financial life

    You and only you are responsible for your financial life. All the decisions, big and little, you’ve made along the way are what have led you to your financial predicament. The less time you waste blaming others, the faster you’ll be able to move on to financial security.

    References:

    https://www.aboutschwab.com/modernwealth2019

    Written Financial Plan

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    “Establish a financial plan based on your goals.” 

    Research continue to show that creating a written financial plan is more effective and beneficial than simply thinking or talking about your goals. The research finds that more than two-thirds of people who have a written financial plan say they feel financially stable, whereas just 28% of those without a plan feel the same way, according to Schwab’s 2019 Modern Wealth Survey. Planners generally know what they’re saving for, how much they need to put away, and how long it will take them to reach their goals.

    “Long term thinking and planning enhances short term decision making. Make sure you have a plan of your life in your hand, and that includes the financial plan and your mission.” Manoj Arora, From the Rat Race to Financial Freedom

    Multiple surveys show that less than a third of Americans have a financial plan in writing. And among those without one, 2 in 5 Americans say it’s because they don’t think they have enough money or assets to merit a form and many say simply that it’s too complicated or they don’t have enough time to develop one.

    But in reality, financial planning is not inaccessible, too expensive or too complicated. A written financial plan is simply formalizing a person’s short-term goals and long-term goals and determining a path with saving and investing to achieve them. 

    Planning in small steps doesn’t take large sums of money to start.  In fact, financial planning can have a profound impact on lower-income households, by helping people improve their saving and budgeting habits. A written plan helps savers prioritize their goals and provides a way to measure success.

    Elements of a financial plan:

    • Create short, intermediate and long term goals
    • An emergency fund
    • A budget to determine cash flow and calculating net worth
    • Paying down and avoiding debt
    • Health and disability insurance
    • Start saving and investing early, pay yourself first and put it on automatic
    • Pay yourself first
    • Saving and investing for retirement and/or college
    • Saving and investing for shorter term goals like vacations or a home purchase
    • Trusts, wills and estate planning

    After creating your financial plan, you are bound to have times when you don’t reach your goals or you diverge from your plan. But, just like with a diet, if you make a bad food choice, it doesn’t mean you throw out your new way of healthy eating or exercising. Same thing with financial plan.

    Planners demonstrate better money and investing habits

    For those looking for a way to stay the course, Schwab’s survey shows that more than 60 percent of Americans who have a written financial plan feel financially stable, while only a third of those without a plan feel that same level of comfort. Essentially, those with a financial plan maintain healthier money habits when it comes to saving.

    A financial plan leads to better habits since financial planning isn’t just about investing. Many sound money management habits and financial decisions are more easily explained in quality-of-life terms—such as controlling consumer spending, the security that life insurance offers, or the peace of mind that having an emergency fund can provide. There are healthy money habits and there are good investing habits; a written financial plan can lead to both.

    “Spending is not the enemy, but it’s important to balance saving and spending so we can both enjoy life’s experiences along the way and achieve long-term financial security.”

    Creating financial goals and a financial plan isn’t going to help unless you stick to your plan over time. One good way to do that is to create a detailed quarterly schedule of money-related tasks.

    Successful planning can help propel financial security and net worth for those who stick with their plans.  Research shows that those sticking with their financial plans achieved an average total net worth three times higher than those who didn’t plan.

    References:

    1. https://www.aboutschwab.com/modernwealth2019
    2. https://content.schwab.com/web/retail/public/about-schwab/schwab-modern-wealth-survey-2019-atlanta.pdf
    3. https://www.schwab.com/resource-center/insights/content/does-financial-planning-help
    4. https://www.schwab.com/public/schwab/investing/why_choose_schwab/investing_principles
    5. https://www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan

    10 Steps to a DIY Financial Plan | Charles Schwab

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  • Key Points
      • A financial plan isn’t only for the wealthy and it doesn’t have to cost a penny.
      No matter how much money you have, you can start with a DIY financial plan that will set you up for future success.
      With a good foundation in place, you can feel more confident about your finances and, when the time comes that you might need the help of a professional, you’ll be that much farther ahead.

    Did you know that 78 percent of people with a financial plan pay their bills on time and save each month vs. only 38 percent of people who don’t have a plan? That’s a pretty powerful statistic if you ask me. Or would it surprise you to learn that 68 percent of planners have an emergency fund while only 26 percent of non-planners are financially prepared to cover an unexpected cost?

    When I hear stats like these that were recently reported in a Schwab survey, it just reinforces my belief that everyone—no matter their financial situation—can benefit from a financial plan. So why aren’t more people planners? Usually it’s because either they don’t think they have enough money or they think a financial plan costs too much. But, as I’ve said many times, neither is the case.

    In fact, you can map out your own financial plan. That way, not only won’t it cost you a penny, but you stand to reap the long-term benefits. Here’s how to get started mapping out your financial future with a DIY plan.
    — Read on www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan

    Panic and Fear are Terrible Investing Strategy

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    Fear of the pandemic spread of the novel coronavirus in the U.S. and across the globe, and the panic selling of stocks has assumed a vice like grip on the U.S. equity markets over the past several trading days.  This is evident by the massive selloff of the markets over the past several trading days.

    Take the S&P 500  benchmark, it has entered correction territory when measured by a ten percent decline from market high. Minutes prior to Friday’s market close, the S&P is down 14.3% from its all time high that it reached less than two weeks ago.

    And the advice from financial advisors and pundits to remain calm and not sell–selling will only lock-in your paper losses into real losses–is apparently being ignored many retail investors. Basically, it appears that a majority of investors have succumbed to financial entertainment media’s hyper reporting of the news.

    No one knows how long the panic selling will continue or when the downward trend will reverse. And, no one can safely predict the impact the novel Coronavirus will have on corporations’ quarterly earnings.

    Couple this with Socialist Bernie Sanders recent success in the first three Democratic caucuses and primaries, this market correct may persist for awhile and may dip its toe into bear market territory before we see the current trend come to an end.

    Needless to say, investors must remain calm and adhere to their long term investment plan. Fear and panic selling has never been a successful investing strategy. And, it should not be embraced today.

    Instead remain calm and if you have cash available, take the opportunity to buy great companies while they’re on sale.

    https://on.mktw.net/2PzwfGR

    Financially Ill-Prepared and Ill-Literate| Financial Literacy

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    Financial literacy represents a significant area of financial wellness. Thus, the teaching of financial literacy must go beyond the basics of creating a budget and avoiding credit card debt. It must deliver real-world skills and knowledge about the challenges of debt and taxes, investing in the stock market, taking advantage of an employer’s 401(k) plans, managing credit and mortgages, accumulating wealth and many other financial topics.

    Definition of Financial Literacy

    The National Financial Educators Councils (NFEC) states, “A lot of people know what they should do; however a good majority freeze up when it comes time to make a financial decision. Most have the knowledge but lack the confidence to make the right decision and take action in a decisive manner. Since money is directly tied to peoples emotional state we feel including this component in our financial literacy definition is critical.”

    Thus, we must take action now to combat this real world threat resulting the lack of financial literacy to Americans financial security. The National Financial Educators Council’s defines financial literacy definition as:

    “Possessing the skills and knowledge on financial matters to confidently take effective action that best fulfills an individual’s personal, family and global community goals.”

    Successful Investors are disciplined and patient, have developed good financial and investing habits, demonstrate positive financial Mindset and exhibit a belief in themselves.

    Conversely, the principals of basic financial literacy and money management are not that complicated. The basic money management concepts are simple and once you have it down, you can apply the concepts for the rest of your life. Considering, the world that high school and college graduates will enter revolves around inherently money.

    “The single biggest difference between financial success and financial failure is how well you manage your money. It’s simple: to master money, you must manage money.” T. Harv Eker, author Millionaire Mind

    A 2009 Sports Illustrated report found that almost eight out of 10 former NFL football players suffer from financial stress within two years of their retirement. What’s more, the National Bureau of Economic Research estimates that one in six will file bankruptcy.

    What is Financial Literacy

    Basically, financial literacy is about effectively managing one’s money. It is an essential personal skill that will benefit individuals throughout their lives – and it is not skill that everybody learns.

    With money, such as wages, coming in and expenses going out, with due dates, finance charges and fees attached to invoices and bills, and with the overall responsibility of making the right decisions about major purchases and investments consistently, managing money can be challenging for most Americans.

    Americans would think that because the financial stakes are so high and the skills of managing money are so essential that this would be a skill that gets taught in high school or even college. Unfortunately, personal finance is not taught in educational institutions at any level in the United States. It is not taught in K-12 education, undergraduate or even post graduate levels unless an individual is majoring in finance.

    Financial literacy and managing money require a fundamental understanding of personal cash flow, net worth, debt, inflation, the purchasing power of money, and a willingness to embrace personal responsibility. That means paying bills in a timely manner, saving for emergencies and retirement, and avoiding excessive debt.

    It is important that individuals accept the fact that sometimes they have to sacrifice immediate demands and gratification for long-term financial security.

    Americans Falling Behind

    According to Money magazine, nearly half of American workers have saved less than fifty grand ($50K) for retirement, and fifteen percent (15%) had not saved a single cent. This means that for many Americans, their senior years will not be so golden and a majority of those will struggle financially due to their lack of financial literacy.

    In the 2018 National Financial Capability Study (NFCS), almost half (46%) of survey respondents have not set aside in an emergency or ‘rainy day’ fund sufficient to cover expenses for three months in case of sickness, job loss, economic downturn, or other emergency according to FINRA Investor Education Foundation

    More than half of millennials (about 54 percent) say debt is their “biggest financial concern.” according to a recent Wells Fargo Study.

    “A compelling body of evidence demonstrates a strong association between financial literacy and household well-being. Survey after survey shows that households that demonstrate low levels of financial literacy are those that tend not to plan for retirement, borrow at high interest rates, and acquire fewer assets.” Shawn Cole

    Taking Responsibility

    A majority of Americans appear to have not taken responsibility for their financial security during their working lifetimes, after retirement or have done much retirement planning before retirement.

    Forty-one percent of respondents have tried to figure out how much they need, their number, to save for retirement, while 54% have not. The act of planning for retirement remains a ‘strong positive indicator’ of retirement wealth, according to FINRA.

    According to Dave Ramsey, the goal behind teaching financial literacy is to help people develop a stronger understanding of basic financial concepts—that way, they can handle their money better.

    Ramsey considers financial literacy a worthy goal, especially when you consider a few stats about how the typical American handles money:

    • Nearly four out of every five U.S. workers live paycheck to paycheck.
    • Over a quarter never save any money from month to month.
    • Almost 75% are in some form of debt, and most assume they always will be.(1)

    Additionally, there’s a $6.6 trillion gap between the pensions and retirement savings of U.S. households and what they should have to maintain their living standards in retirement – and the gap is growing. Retirement Income Deficit report by Retirement USA tells us that:

    • 41% of baby boomers expect their standard of living to decrease in retirement. Transamerica Center for Retirement Studies.
    • Only 14% of baby boomers have a written retirement strategy. Transamerica Center for Retirement Studies.
    • 83% said that personal financial challenges had a large impact or some impact on overall employee performance. Society for Human Resource Management
    • 46% of Americans have less than $10,000 saved for retirement. Employment Benefit Research Institute
    • Student load debt exceeds $1.1 Trillion. Fastweb and FinAid

    “The number one problem in today’s generation and economy is the lack of financial literacy.” Alan Greenspan, Former Chairman, Federal Reserve

    Financial Literacy must become a priority in our high school classrooms and college campuses across our great country. Too many Americans are being left behind financially due their inability to effectively manage their money and control their personal finances.

    Over the past decade, the U.S. economy has witness the longest period of economic expansion in it history. Yet, a majority of Americans failed to participate in the expansion as measured by the widening income, wealth and retirement gaps evident in the country.

    And, you can conclude that the lack of financial literacy is a major reason behind the gap.

    Sources:

    1. https://www.usfinancialcapability.org/downloads/NFCS_2018_Report_Natl_Findings.pdf
    2. http://www.retirement-usa.org
    3. https://www.daveramsey.com/blog/what-is-financial-literacy

    Accumulating Wealth

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    The wealthy accumulate wealth by being frugal

    Frugality – a commitment to saving, spending less, and sticking to a budget – is a key factor in accumulating wealth, according to DataPoints’ founder, Dr. Sarah Stanley Fallaw.  Dr. Fallaw is also the co-authored “The Next Millionaire Next Door: Enduring Strategies for Building Wealth“.

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    In an University of Georgia’s financial planning performance lab research paper examining the topic of “what does it take to build wealth over time”, the key findings were that those who were successful at accumulating wealth frequently exhibited the following behaviors:

    • Spending less than they earned
    • Having a long-term outlook on their financial future
    • Maintaining sound financial records
    • Keeping up with financial markets
    • Saving regardless of income level

    Essentially, her research shows that anyone can accumulate wealth if they know the right steps to take. And, if individuals possess a certain set of characteristics, they may be more likely to become wealthy, according to Dr. Fallaw, who is also director of research for the Affluent Market Institute.

    In her research, she found that six behaviours, which she called “wealth factors,” are related to net worth potential, regardless of age or income:

    • Frugality, or a commitment to saving, spending less, and sticking to a budget
    • Confidence in financial management, investing, and household leadership
    • Responsibility, which involves accepting your role in financial outcomes and believing that luck plays little role
    • Planning, or setting goals for your financial future
    • Focus on seeing tasks through to their completion without being distracted
    • Social indifference, or not succumbing to social pressure to buy the latest thing

    In order to accumulate wealth, it is imperative for investors to understand that their underlying financial behavior and habits matter significantly. DataPoints research supports the notion that, “…individuals who successfully accumulate wealth often engage in basic and identifiable productive financial management behaviors.” And, they are often “socially indifferent” to the latest “must haves” and they resist the “lifestyle creep,” which is the tendency to spend more whenever they earn more.

    To properly build wealth, financial experts recommend saving 20% of your income and living off the remaining 80%. Many wealthy individuals, who religiously follow this principle, espoused the freedom that comes with spending and living below their means.

    Reference

    1. Grable, J. E., Kruger, M., & Fallaw, S. S. (2017). An Assessment of Wealth Accumulation Tasks and Behaviors. Journal of Financial Service Professionals, 71(1), 55-70.
    2. https://www.datapoints.com/2017/04/06/tasks-of-wealth-accumulators/
    3. https://apple.news/A4YIQ2ahsSKqzUG3rh1PmTQ