Financially illiterate? It sounds grim. For a generation without the safety net of corporate pensions, and tasked with making critical investment decisions for themselves and their families, insufficient financial education can lead to poor financial and investment choices. These bad choices have implications that last a lifetime. The national scope of this problem led the U.S. Senate to recognize the importance of financial literacy for all Americans and pass Resolution 316, officially designating this month as National Financial Literacy Month.
In plain English, financial literacy means individuals must have skills to make informed and smart decisions about money they earn or inherit, identify present and future needs, and understand how to effectively save, grow and manage that money to meet those needs. It requires a basic understanding of capital markets, the ability to project current earnings and savings to reach specific goals like college costs and retirement, budgeting skills, and a grasp of the fundamental principles of investment.
Women face some particular challenges. They earn less money than men and spend less time in the workforce, primarily the result of leaving to raise families and care for aging parents. How much progress have we made toward greater parity? Well, in 2004 when National Financial Literacy Month was declared, women earned 76.6 cents for every dollar men earned. Today, nearly a decade later, it’s 77 cents. This translates to less retirement savings and a greater risk of a shortfall as women age. In recent years and through educational initiatives, nonprofit organizations such as WISER (Women’s Institute for a Secure Retirement) have recognized the unique challenges faced by women of all ages, and provided help to women to achieve financial literacy and learn successful money management.
There are some bright spots, though. Today, the majority of college graduates are women. They account for close to 50 percent of the workforce, and play increasingly dominant roles in society as mothers, professionals, entrepreneurs, politicians, grandmothers and surviving spouses. A recent survey of 1,400 households by Prudential Financial found that, in more than half, the woman was the primary breadwinner. According to the Federal Reserve, women now control 51.3 percent of all wealth in the United States; by 2020 that number is projected to grow to 66 percent.
Here is our short checklist for Financial Literacy Month.
Save Save Save. Pay yourself first each paycheck, even if it’s a small amount. If you are working and have access to a 401k plan, contribute at least enough to get a company match. Saving is a habit; investing the time to develop it may be the best investment of all.
Have a better understanding of risk. If you move from the basic fixed investments like guaranteed accounts and CDs, you need to understand risk and how strategies like balance and diversification can help to minimize it. We know that financial markets can swing wildly on their way to their ultimate returns; more money is lost through bad investment decisions than from bad investments.
Before you choose investments, choose the right account. There are 401(k)s, IRAs and Roth IRAs for retirement savings, 529 plans and Coverdell accounts for educations, annuities for tax deferred savings, and of course, regular savings and investment accounts. Understand the advantages and disadvantages of each, match your goals to the proper type of account and focus your efforts.
Make financial literacy an ongoing effort. Be selective. The giants of investment and finance like Malkiel, Bogle, Lynch, and Buffett have made their experiences available to us in plain English. Learn from them. Be wary of fear and greed. They trip up even the most experienced investors.
Don’t be afraid to ask for help. There is an overwhelming amount of investment and financial information out there, including Internet sources, which can be conflicting, confusing, and often outright wrong. You may want to work with an advisor or financial planner; just be sure you understand that conflicts of interest are rife, and that different advisors have varying levels of legal duty to their clients.
Understand Your Social Security benefits. Yes, it has problems. We know that benefits and eligibility must change over time. However, Social Security remains a critical part of retirement planning for most Americans, and there are choices to make as to when and how to take benefits that have an enormous impact on your future retirement.
Gloria Harris is director of client services and Steven Weber is the senior investment advisor for The Bedminster Group, a registered investment advisor providing investment management, estate and financial planning services. The information contained herein was obtained from sources considered reliable. Their accuracy cannot be guaranteed. The opinions expressed are solely those of the authors and do not necessarily reflect those from any other source.