When I thought about financial literacy, particularly for beginners, it took me back to my younger years and the mistakes I had made and the lost time (and now wealth) these mistakes created. This wasn’t to scold me about these mistakes; I’ve done that part already, but to think about what I, now sitting at this desk, would want to tell that guy 20 or 30 years ago to do.
And perhaps not even to tell him what to do, but to set out what a lack of financial literacy and its application can do over a lifetime.
That is how I wanted to approach this article today. It’s a nice break from the regular writing in our accounting tutorial series. It provides another avenue for this very modest website to perhaps help – even one person – along their financial path.
Where to Start
The question, of course, is where to start? Where do we beginners begin to improve our financial literacy (I was there not that long ago)? We all come to this point from different paths and carry additional baggage—various money mistakes made, incomes, expenses, debt levels, and ages.
But the one thing we all do have is the desire to improve our understanding of money, which is what the fancy term “financial literacy” really means. It’s about how you think about money. And a significant effect on this, of course, is how much you know. Not what you think you know, but what do you really know.
The other day we wrote an article about the principles we have followed in the creation of wealth. In that article, we covered the following key points necessary to our financial planning and financial doing.
Spending
You have to spend less than you earn: I know, rocket science this is not. But you would be surprised that even this most basic of ideas may be “understood” by many, but they do not do it. It’s hard controlling the person looking back in the mirror (credit to Dave).
Savings
You now have to keep that difference between income and spending. Another radical concept called savings, foreign to many. A study in the US back in 2017 found that approximately 40 per cent of Americans would either have to borrow (yes, using your credit card is borrowing) or couldn’t come up with the money at all to cover a $400 emergency. Not to pick on our American friends, I suspect this would be similar for many people worldwide.
Investing
You need to be saving that money not only for emergency expenses, because Murphy will visit, but to invest! Boy, should I have started this much earlier in life. I remember thinking to myself at one point about this … “not to worry, plenty of years to keep earning”. I shake my head, thinking back to this mentality. This example alone, with no other evidence, shows I didn’t understand money back in the day. And part of this could have been because the investing bit can be the hardest for many. They don’t know where to start with this. Hopefully, we can help.
Planning and Review
Although it is principle number four, it is almost as important as the other three. Of course, you will get away without doing it. But why put all that effort into something and not be focused on it. Planning, which is all a budget is, and review are critical to you, ensuring you have the best opportunity for building the wealth you wish to achieve and what you are going to do with it! Or any road will get you there …, and often people give up. Not by intention, just my life being busy and distraction (the weeds) blocking out the path to building wealth.
What to Read
So those are the fundamental principles we have put together, well have come together, in our journey as beginners and improving our financial literacy. So now we have to give credit to the three significant influences that got us on the right path to building (still modest) wealth.
We did not think up our principles, nor did the people we recommend below. But what we follow comes directly from these three books—starting with the most influential at the top.
The Total Money Make Over
By Dave Ramsey
You can see Dave’s influence through this whole website when we talk about personal finance. His seven baby steps gave us a simple path to follow that even I could do. He does take seriously the desire for beginners to improve not only their financial literacy but their lives!
If you did nothing else and just read this book or even less, you will build wealth by following those seven steps. It’s pretty much guaranteed – although I’m not, and nor does Dave. But wherever you are on the path, he sets out how you can pick it up and “run” with it. You might be at step one and not have $1,000 saved as an emergency fund. Or you might at step four and be wondering what investment approach to take. We moved away from Dave’s program and headed on our path on this last point – taking the principles he had taught with us. I disagreed with his focus on managed funds, but only time will tell if this was a wise move. But at least nowadays, it is with eyes open, rather than blindly stumbling forward.
We will always be in debt to Dave and what he teaches – for which he credits God and grandparents – they were teaching this well before Dave stumbled across it.
The Simple Path to Wealth
By J L Collins
A book that helped us get to grips with the investing side of things. It was a little like the baton had been passed from Dave to Jim to help us along this path. Such an excellent and yet simple (it’s in the title, I know) book will enable you to build confidence in what you have been doing in following the baby steps and now taking the step to investing those savings. And Jim’s approach is even more straightforward; buy a broad market index fund, and over the long term, one can’t go wrong.
Using the US equities market as an example, as so many do, the returns over the long term will get you there. Using the S&P 500’s performance over the last 100 years would provide you with an annualised return of over 10 per cent. Through all of the highs and lows of this term, that is still a pretty good return. Let’s say you started with $100 in 1919 (a relatively tidy sum back in the day); what would you have now? Using the time value of money, you would have approximately $2.2 million. That is a tidy sum of money these days. Sure, you aren’t here in 100 years to use it, and past performance should not be used as a predictor of future performance. But you can see what long periods and compounding can do.
Not as forcefully as Dave, but Jim also has a good message about debt. We took the Dave approach, avoid it. And if in it, get out as fast as possible. Perhaps we should have another principle added to your wealth principles above. In any case, the removal of leverage, the fancy finance term for debt, has been a massive step for us.
The Richest Man in Babylon
By George S Clason
We have put this book last on the list not because it isn’t as valuable but because the story will reinforce what the other two have taught you. Taking the plans from Dave and Jim and overlaying them with an account will help to strengthen what you have been doing.
It isn’t the icing on top, as there is much to be learnt from the book regarding work and grind, but it is a more worthwhile read if you are already on the journey as one of the beginners improving your financial literacy through doing and reading. Then repeat. The book will only be a lovely series of stories for you unless the doing bit is already under full swing. In particular with Dave’s book isn’t about learning some new method or clever approach to money. It’s about doing something. Stop all the reading and get moving! This means now that you are moving, the learnings from this type of book will have a much more significant and longer-lasting impact on that journey.
For me, the key messages from this book are the simple ones; spend less than you earn, save it, invest it. And then invest in those investment returns. Let the money trees grow. Please don’t cut them down before they can provide you with real returns and real wealth.
Now What?
My recommendation, after finishing this article and leaving a comment, of course, is to buy or better still borrow Dave’s book. Get it from the local library and save $10. And apply his seven baby steps from the start. You may well be partway through them when you start. Great! Those will be easy to tick off and give you some confidence in your journey. But if you are at step one, a $1,000 emergency fund, you now know what you have to do next. Dave has excellent advice on getting that money together quickly. And be most quick about it. Don’t muck around thinking about it too much. Get the $1,000 done – and then move onto step two. And keep moving …
Conclusion
Get started, keep moving. Financial literacy and its application, in particular for beginners, needs to become a lifelong process. Your financial journey is not a sprint, a quick get-rich process, and you will not win the lottery. The long lost great aunt is not going to leave you a small fortune. Get some knowledge from these great authors and start doing.
Get started, keep moving, and enjoy the journey you are on.