The importance of financial literacy can be highlighted with the current situation of the majority of adults. Right now, half of Canadians and Americans live paycheck to paycheck. There are over one trillion dollars in credit card debt in the US, and $13.8 trillion in total debts including mortgage, car loans, student loans and lines of credit. In Canada, average credit card debt for a household is over $70,000.00 with an overall consumer debt of $1.9 trillion in the first quarter of 2019.
When it comes to savings, the picture is not looking good either. In the US, about 22% of adults have less than $5,000 saved for retirement and 46% expect to work past the retirement age. 32% of Canadians between 45 to 60 years old have no retirement savings either. There is a looming retirement crisis in the near future.
We need basic financial education in order to build a good financial foundation for us and our family. When it comes to becoming financially stable, money is not just the key component in acquiring wealth.
How do we acquire wealth?
I am part of the statistics with too much debt and little to no savings. Every single time I get approached about starting a retirement fund, I always use the excuse that I am barely living on what I earn and there is simply nothing extra to be set aside for retirement. As I get older and retirement seems to be not too far off, the realization hit hard that I need to start focusing on my financial health.
The truth is it takes money to make more money. Somehow I was convinced to start my savings fund. I tracked my expenses and savings accounts. I opened a retirement fund account and hesitantly started putting in just $25 a month. After a couple of months, I realized that I really did not miss that $25 being taken from my chequing account and I want to see my fund grow faster so I increased my contribution to $100 monthly. It took me a couple of months to adjust to the decreased spending money on had, but I was able to adjust. I decided to increase it by a bit again. I am nowhere near what I should have saved at my age already, but I am slowly building my savings for when I retire.
How to get out of debt?
Debt is the other four-letter word that no one wants to talk about. Even husbands and wives don’t talk about their individual debts to each other. It seems to be a taboo subject among friends as well. How do we get out of debt when we are already living paycheck to paycheck, as most working adults do?
First and foremost, you need to know the total debt you have accumulated. List down all the credit cards, you have and the balance each of them carries. Write beside it the interest rate you are being charged. Now you have two options: pay off the card with the lowest balance first, or the card with the highest interest rate. While paying off your debt, try to look into your expenses as well and identify which ones are your “needs”, “likes”, and “wants”. Your needs will be your priority, and minimize or eliminate spending for the likes and wants. These “likes” and “wants” are most likely what racked up your credit card balance.
What is a solid financial foundation?
Saving money and paying off your debt is part of having a solid financial foundation. But the most important of which is your insurance. Are you and your family properly protected from death, illness, accident, or losing your job? You can start saving money but if any of these happen to you, all you or your family will have left is the balance of your savings account.
Here are the items you need to have covered in order to have a strong solid foundation, based on its importance:
- Paying off debt, or debt management
- Having an emergency fund
Another thing that gets to be the least in priority is insurance, be it to protect your life, for critical illness or disability. We don’t mind paying hundreds of dollars towards our car insurance, but we tend to take the cheapest and lowest coverage for our own protection. Some people also think that they don’t need life insurance because they are still young and healthy. But it is at this moment when it is ideal to get started.
When you wait until you are no longer healthy, then you either become uninsurable or your cost of insurance becomes too high. There are different kinds of life insurance and the most affordable of them in the short term is Term Insurance. If you really can’t afford to get permanent insurance because you are still dealing with paying off debts, then term insurance is the second-best thing. This guarantees you to permanent coverage later on, as long as your term insurance contract is both renewable and convertible to permanent insurance. You can get covered by a 10-year term for as low as one fast food meal per month, depending on your age and smoking status.
All the financial journals, advisers, and companies advise setting aside at least three months of living cost for your emergency fund. There are guides online on how to save up to $5,000 a year. This will help you with your living expenses for the next three months in case of sickness, job loss, or other calamities. You can make use of an investment account, or just your regular savings account. Regardless of where you keep your emergency fund, this should be accessible to you when the time arises. You can’t put your fund in a locked-in investment if it is intended for emergency use since you don’t know when this emergency might occur. You may end up not using it at all, which is always great. The important thing is that you have it in case you need it.
By following these steps and/or suggestions, you will be on your way to having a solid financial foundation.