Lack of Financial Education | How to get started for beginners
Updated: Feb 18, 2020
Hello Ladies and Gentlemen, welcome to the Elias Talks v-log where I talk all things money. Today we're going to be talking about the importance of financial education and how to get started for beginners.
Last week I talked about the top 3 reasons why people go broke and what to do about it. The top item on that list was lack of financial education. It might seem simple on the surface spend less money that you make, and put the rest of it in a retirement account with bank. The 10 percent number has been thrown around a lot. But it goes much deeper than that. There is a lot of information out there so it can be confusing and some it can be different depending where you live. So I'm going to talk about how to get started on that path of better financial education for beginners from the ground up. Including the right head space you got to be in. This is a very large and important part it.
To start off we all know there is a lack of financial literacy, and it's been described by some experts being at crisis levels. Nothing to little is taught about it within the education system in schools especially in North America.
For example, 1/3rd of Americans can't pass basic financial literacy. A Forbes Article published in April 2018 highlighted some concerning stats:
44% of Americans don't have enough money to cover a $400 emergency.
43% of student loan borrowers not making payments.
33% of American adults have $0 saved for retirement.
Meanwhile this is despite strong evidence that those who have financial education do better in management of their finances. There are numerous studies on this. Just taking a look at Scandinavian countries for example like Norway, Sweden, & Denmark where there is more education in the system from a younger age I believe it is Grade 1 to high school in Sweden. They have much better results on savings.
According to the O.E.C.D in 2018 in Norway, Sweden, Denmark it is 18.4%, 12.8%, and 12.5% respectively. Meanwhile in US and Canada it is 2.4% and 3.0%. What's more is that the cost of living relative to income is higher in to these countries. Check out:
Perhaps there is a mentality here that we think is the role of the parent. But what if the parent themselves does know then it is the blind leading the blind. It seems crazy we'd be teaching our kids how to wrap a banana in school, but not providing proper financial education.
In prior generations like for the boomers they had defined benefit retirement plans, but that is change since 2008 to defined contribution so people need to be knowledgeable about their investing. This is because the amount they would get at retirement is no longer guaranteed and the investment risk has been shifted from the employer the employee. Essentially if you're living somewhere the financial education is not good you're going to have to get yourself up to speed.
There was a study a few years back that talk about the reason that businesses fail. It wasn't some of the typical things you would think of like Technology Obsolesce or Marketing issues that were the number one things, but financial mismanagement 95% of the time.
I believe this is relevant because essentially we are business owners whether it be just in the business of us or we are owning a company. If you look at yourself like business marketing yourself and technology skills are very important to able to generate a good income, but you also need to make sure your operations department is well. Then where is your finance department? It's not just the money coming into your bank account it's what you do with it once the money comes in off course. This is where the financial education comes in it is your backbone of the company of you.
So if you don't understand finances and you want to get started you're probably asking how can I get start to become fully financial literate:
There are two general categories when it comes to getting down this path. Firstly, understand everything that is coming out of your bank account to the best degree possible and questioning it in detail. Then look thoroughly doing with the investing side and learn about that.
To do this it requires to be in the right head space the right mindset of questioning everything it takes time and it takes effort. If you have a little bird in your head that says I'm not good with money, get rid of that bird talking to you. That is the enemy. Tell yourself you're going be become the money master of it the and you're going be the king or queen of money and know everything about it, better than everyone else.
Positive talk is important for many who have a problem with some aspect of their financial life. They have some sort of emotional insecurity which blocks them from acquiring the needed tools to be proficient.
In business there is a thing called zero based budgeting where you need to justify each and every expense and see if you getting value for it. So pull out your bank statement, credit card statements, and bills for past 12 months and go through what's leaving your account line by line and scrutinize and question everything whether it's necessary or not or whether the amount itself can be reduced.
Start with the bigger items first then if you don't understand something research it. There is not a one size fits all solution for people. Start asking questions to yourself. Like how much money should I be paying as a percentage of income for my house? Depending on where you are from the answer is different, and the sources of information are different to get the answers. Sometimes it can be found online, or you might have to go into a government office. You might have to ask around a bit.
When you look at your mortgage statement you will see that the balance went down from the beginning to the end of the year, but by less than the amount that you paid. The difference interest versus principle. Then look at the interest rate and say is it too much? Can I get out of my mortgage if I wanted to? How much would it cost to get out? Pull up your agreement. Are there different types of mortgages which would with smaller penalty? Ask why why why like a child!
I had a good friend in high school that I used to tease, actually that's not true I still do. :-) One of the things I used to tease him about was the number of questions he would ask. As his roommate it was a bit frustrating, but he's done well with himself. When he would keep asking questions we would kind of mock him, but he didn't stop he just kept going with the questions. So for example if we're doing a math problem he would ask what answer I got, and I'd be like 10. Then he'd be like how did you get ten? Then I'd be like I took x + y and dividing by z, and he'd be like why did you do that? For which I would respond, and then he would say why didn't' you take x + z and divide by y instead? And it would just keep going until he fully understood.
Sometimes I would get so frustrated I would refer him to the answer at the back of the answer guide and tell him to work it out! But his approach for not understanding is correct when you don't understand something. I call it the "why why why" approach, and it is really what you would need to do when you don't understand something.
I should qualify it by saying it's not necessary to get answers from a human being these days. That was along time ago, and now there are a lot of resources online. By asking a lot of questions the quality of your questions will also improve, and so will your discernment to determine if the answer is sufficient.
Getting back on track if you are renting ask yourself if you would you'd be better off buying a home. Start researching doing the actual math taking into account equity that you would be getting in the home by purchasing through mortgage pay-down, plus potential upside property appreciation etc. Then keep asking more questions what determines house prices going up and dig in and learn etc. You'll find things like jobs, GDP growth, population growth (immigration), and demographics. How are these things in the area you would potentially buy a home?
Then look at your utility bill for example where it was high and try and work through the math. If you can't understand call the utility company and ask. Question how much others are paying relative to the size of their home and do some research etc. You might realize you have a small water leak that is costing you a lot of money over a long period of time for example.
In the case of your car loan for example how much a percentage of your income are you paying on your car. Is it appropriate etc.? Can I make due with a car is that cheaper? Then say if your leasing a car are you paying too much for my car lease. Is there a way to get out? Is it worth it? Then start doing the math.
Question everything 2 or 3, 4, 5 levels deep like you're toddler and start research and asking questions starting with the bigger expenses. The internet has made this much easier. Getting yourself in this mindset of questioning everything and then doing research asking questions you'll start to learn it is inevitable. You'll start your brain working and you'll start to think of all kinds of things. This is called Active Learning!
Again start with the big things to learn everything about your expenses. Problem is with a lot of people they know more about the big screen TV or cable package they got it than the details of their mortgage or utility bills. They do priority based on things they like rather than the financial impact necessarily. Don't let your preferences or comfort zone dictate what to research when it comes to your expenses.
You'll potentially need to talk to various people when going through your expenses. Don't be shy to trouble people. Don't care what other people think. If you want to be winner ultimately you can't be too wrapped up with what other people perception of you.
You are the CEO of your household and take it like your running a company. Great business leaders like the late Steve Jobs, Henry Ford or Aliko Dangote don't care what others think. Your going be the great business leader of your financial life to do so you need to understand all your expenses.
Then inevitably if there are issues your going have to take action. You might have to make some tough decisions and give up some things, and make some sacrifices. This is where the self discipline part that I talked in my last video comes in and I'll talk about that in a future video. You'll have to align your thoughts, emotions, and actions. This is key.
Once you go through the process of rationalizing all your expenses you will want to see how much money you have left over. How much it is as a percentage of your income on average on a monthly basis. Ask yourself how much money is need by the time you retire to live comfortably, and at what average rate of return would you need to invest. What is a realistic rate of return? Do I have an emergency or rainy day fund if something happens like job loss, or emergency home or car etc. is it enough.
Saving and Investing:
Now that you've worked through rationalizing the outflows and determined how much you're going to need to put aside for retirement. and Note this is after setting up your emergency fund. You'll need to learn about investing. This is the part that most people are intimidated by. There are various things that you can invest in typically for most people it's stocks, mutual funds, or exchange traded funds, and or real estate.
Start ask questions about your current investments if you have some like why am I invested in this stock for example or mutual fund how has it done. How much am I paying for this mutual fund and what are the fees? How do the fees work and have I been getting an ample return? How have the returns in whatever I'm making compare to the market? What exactly is the mutual fund investing in? If you get the answer emerging markets that's kind of broad, ask what countries exactly and how much in each one, and exactly what sectors in each country and what type of companies. Drill all the way down as far as you can go.
Now ask if there something else where I can get a better return, and how much risk is in it? If you're investing in a company what is their business is it a growing business. What are their financial statements like, do they have revenue, what are their profit margins on their products or service is it good or bad margin? How does it compare to similar companies? It goes on on why why why? You have to get your head around whatever your investing in, and if you don't understand something don't invest in it.
You have to be able to justify and rationalize why your investing several levels deep. For a lot people I would say if you're limited on time invest in a low cost index fund where the level of research that you'll need to do is less. Something that mirrors the s&p 500 for example which has averaged 10% over roughly the past 100 years. Learn to make estimated projections and assumptions as far as your retirement. Then revisit your expenses if you need to.
But, I'm going to be real with you if you're willing to take the time to do the research you can beat the s&p 500 by picking individual companies, though many experts will tell you that you can not. I will share my strategies in future videos.
Lastly, looking at your expenses and investments is a continues process do it every month. Learning is life long thing you should commit to it. Things change over time. You need to set aside time and review it like your life depended on it, and literally it could especially in your elder years. Like a business cut time from unproductive activities if you need to.
Corporations do monthly, quarterly, and annual budgets for their money, so take that same sort of approach, and I'll talk about this further in my video about how to control your spending next week.
Thanks for watching my video if you enjoyed it please like and hit the subscribe button as well as the bell button so you get notified immediately when my new videos come out. Take the approach of asking why why why with your expenses and investments and you should do well with time and perseverance. Keep your feet on the ground, but your head in the sky! Over and out.