personal finance

Financial Education is Critical

There should be no surprise when I say that we live in interesting times. This is especially true when we think in terms of our National economy. I have often argued that we will eventually find our way out of this mess, however the time it will take is anyone's guess (and despite what the talking heads on the news will tell you, it is a guess).

There is no single decision or action that we could have taken to avoid our current financial struggles. Regardless, I do believe that teaching personal finance in our public schools could have reduced the dramatic effects that we all feel today.

The Impact of Financial Decisions

Everyday we make at least a few financial decisions. We have the tendency to assume that these decisions only affect us in the short-term. However, over a significant amount of time these financial decisions begin to define our behavior and, consequently, quality of life.

Many of us are not equipped with a basic understanding of personal finance before we graduate from high school. So it can’t really be expected that we know the right financial decisions to make as we become adults. This has a significant impact on our personal lives, the lives of our loved ones and our economic prosperity.

Financial Education is Critical

Provided that finance plays such an important role in our lives, it is critical that financial education is included in our school’s core curriculum. Imagine knowing what you know now about personal finance when you were just becoming an adult, I bet you would have a little more money in your pocket and a little more freedom to enjoy.

Now take that one example of the value of financial education and multiply across the entire United States. Imagine the improvement in our everyday lives as we make better financial decisions as a Nation. I believe that overtime, the impacts of sound financial decision making will have a huge impact on our economy and improve our standard of living across the board.

Learn More About Personal Finance

I have my doubts that this article will have an impact on our Nation’s education policy. So, with that said I believe that we are on our own when it comes to teaching ourselves and our children the importance of a financial education.

Luckily, there are thousands of websites and books that provide information about financial planning and personal finance in general. The hard part is finding the time in our busy lives to actually sit down and read it.

One way that I’m able to find the time to consume large amount of free information is through the use of RSS readers for blogs. When I’m on the bus in the morning, I download all of the new feeds from my favorite blogs and read them on my way to work. It’s free and easy.

I believe that with more financial education in our schools, we will be able to make better financial decisions and consequently improve our standard of living. I believe that this is true on the individual and National level. However, until our schools include financial education in their curriculum, we can always get good and free financial information from blogs and books.

The Basics of Personal Financial Management

Personal financial management is mix of art and science, as there are many objective and subjective elements to consider. Regardless there are a few basics of personal financial management that everyone needs to understand and implement.

These fundamentals included creating and maintaining positive cash flow, saving and investing consistently and maximizing employee retirement benefits. These pillars of sound financial management will help you improve your financial situation and could lead to financial freedom.

Cash Flow is Everything

One of the largest challenges in the financial planning process is maximizing positive cash flow over time. This is due to the fact that, in most cases, our incomes are capped at a certain level. Quite often it is easier to cut expenses than it is to grow our income. So with that said, to create positive cash flow over time we need to maintain an active role in the execution of our budgets.

It is easy for spending to get out of control. Over time loose budgeting and spending can get us in a financial situation that is difficult to recover, not to mention never accomplishing our financial planning goals and objectives. Positive cash flow is the most important element in personal financial management, ensure that you are spending less than what you earn.

Save and Invest Consistently

No matter the current economic environment, time is on your side. Research has shown that most successful savings and investment strategies are consistent and diversified. Consistent investing (investing a set amount every month) leverages the ebbs and flows of stock market fluctuations.

The most experienced investors and robust trading algorithms cannot predict market moves every time. This is why we must save and invest in the bad times just as often as the good time. This not only ensures that you keep your saving rate as high as it can be, but it also takes advantage of market environments that are advantageous to investors (such as dollar cost averaging).

Maximize Employer Retirement Benefits

Over the years employees benefits, such as retirement plans, have become less and less generous (for the lack of a better word). Employers that once reward employees with defined benefit plans (pensions), have effectively converted their business liability into market risk, borne by you the employee and investor. They did this by reducing the amount of defined benefit plan and started to implement defined contribution retirement plans.

Regardless of this shift, you still need to make a valiant effort to maximize your employee retirement benefits such as your 401k. Tax advantageous plans such as these help you reduce your tax liabilities and maximize your savings rate. These are two very important elements in a sound personal financial management process.

Implementing these three basic personal financial management elements in your financial plan will help you improve your financial situation. These “no brainer” financial planning fundamentals are often overlooked, ignored or underrated. Every expert will tell you that creating a budget with positive cash flow that allows you to consistently save and invest in tax advantaged retirement plans is sound financial planning.