As the National Financial Literacy Month comes to a close, it is a good time for each individual to evaluate his/her level of financial literacy. There have been numerous financial literacy events held around the country at all levels of government, financial and educational institutions, schools, community-based and non-profit organizations to help individuals increase their financial knowledge. These events fill the void in our education system where financial education is only taught on a limited basis at schools, colleges and universities. The great majority of schools have determined that their only role is to provide students the knowledge needed to acquire a job and not how to manage or maximize the income generated from their jobs. They do not take a holistic approach to education. As a result, we have a population in America that learns how to manage their financial resources by chance or luck. Often the resulting financial decisions have negative consequences that impact lives of people for many years as well cause unnecessary drainage of financial resources from households week after week, month after month and year after year.
The recent economic downturn caused many individuals to realize the need to increase their level of financial literacy so that they can make sound financial decisions in the future. Financial literacy can be achieved if you take the initiative to learn and plan wisely. The roads to financial success are discovered by knowing the keys to financial growth and using them correctly. Here are some of the keys to financial growth:
•Knowing and understanding the economic cycles;
•Knowing your current financial situation;
•Knowing how to use personal money management concepts such as how to manage credit, budget, save and invest, establish financial goals, and risk management;
•Knowing and understanding two fundamental concepts -- present value and future value of money;
•Knowing how to choose investments to suit your particular situation as an elderly, young, poor, or higher-income person;
•Knowing what tax deductions are available and determining their monetary value; and
•Knowing your financial, savings and investment goals.
It is reasonable to expect the economy to go through business cycles. For more than a decade, the purchasing power of Americans has been affected dramatically by these cycles. These cycles negatively impact most groups at all socio-economic levels. To counteract this, people must initiate every effort to avoid becoming victims of theses cycles. We must learn to manage our money like a corporate giant. During an economic downturn, corporate giants maintain additional cash or investments easily convertible to cash. This is called, "maintaining liquidity." There are two primary reasons why a corporate giant would want to maintain liquidity: (1) during a recession, corporate earnings are usually lower and difficult to predict. Because earnings are lower, the ability to meet outstanding debt is uncertain. A corporate giant would maintain sufficient cash reserves (liquidity) to meet outstanding debt and to avoid creating new debts; and (2) during a recession the financial managers of corporate giants like to keep their options open to take advantage of certain price changes that may occur, such as bargain sales and investment in under-priced securities.
Like a corporate giant, during a recession, individuals and households should do the following: (1) create liquidity by limiting their purchases to necessities and avoiding new debts (individuals and households, like corporate giants that have a large amount of debt outstanding, will not do as well as those that are more liquid); and (2) maintain investment consistency and flexibility. It is important that you be consistent and flexible and willing to move from one investment to another as financial markets change. Consistency and flexibility help you maximize your total return on investments.
At all times keep in mind that you use your financial resources to sustain and create wealth for yourself. This includes investing in something that will increase in value above the price you paid for it and increase faster than inflation. If your return on investment is greater than the rate of inflation, you have increased your purchasing power or wealth. However, if your return on investment is less than the rate of inflation, then your purchasing power has decreased.
You should make each month a financial literacy month in your household. There are books, newsletters, websites (e.g., www.aie.org, www.jumpstartclearinghouse.org, http://www.sfepd.org and more), seminars and workshops available, where you can gain new financial knowledge to help you meet the never-ending challenge of making informed and sound financial decisions.
Theodore R. Daniels is the Founder and President of the Society for Financial Education and Professional Development (SFEPD). Founded in 1998, SFEPD is a non-profit organization whose mission is to enhance the level of financial and economic literacy of individuals and households in the United States and to promote professional development at the early stages of career development through mid-level management.