In 2009, the U.S. Department of Treasury and President Bush’s Advisory Council initiated the first national study on American's financial capability. The goal of this study was to pinpoint key indicating factors for financial capability. In one of their studies done in 2015, on financial literacy, participants were asked five questions relating to economics and finance. The study found that a significant 63% of participants answered 3 or fewer of the 5 questions correct. For a similar test to the one performed in 2015, click on the following link to test your financial capability.
Importance of Financial Literacy
Understanding financial terms and concepts will have a positive impact on your financial decisions, overall pointing you in the right direction towards financial success. Enabling you to live a self-sustaining debt-free life. The purpose of this blog is to highlight important areas of knowledge in the financial world and provide you with a basic understanding of concepts that you can use to build a foundation of financial understanding.
Net Worth
What exactly is your financial net worth, and how do you calculate it? Well, from a very simple perspective your net worth is the outcome of an equation subtracting one number from another. The equations to calculate your financial net worth is simple, take all your assets and subtract your liabilities. In layman’s terms, this means take everything you own with monetary value (assets) and subtract everything you owe (liabilities).
Assets
Anything that has value to which you can convert into a currency or is a currency in and of itself. See below for a list of some common types of personal assets.
- Savings Accounts
- Property or land
- Personal property such as cars, boats, jewelry
- Any investments you might have
- Retirement funds
Liabilities
These are things you owe money on, and how much money you owe. Pretty much your outstanding debt. See below for a list of common liabilities.
- Current Liabilities: debts or financial obligations due before one year. i.e. income tax, short term loans, interest, credit cards.
- Non-current Liabilities: debts or financial obligations that are due sometime beyond a year. i.e. bonds, mortgages, loans, differed tax liabilities.
- Contingent Liabilities: types of liability you might owe depending on an event such as any lawsuits.
Savings
This is an important and often neglected aspect of personal finance. Many people put off the priority to save, or frequently dip into their savings funds. In general, there are 4 different types of savings funds you should start or have.
- Emergency Fund: This is by far one of the most important resources you should accumulate. This is a savings account that you only tap into when something unexpected happens. Financial guru Dave Ramsey recommends that you have an emergency fund that will cover your expenses for 3 to 6 months.
- Retirement: Some businesses and companies offer retirement savings plans. However, if you work somewhere that does not offer one, start saving up for your retirement early. When you get older and working becomes harder you will thank me.
- Kids Education: If you have kids, and you want to help pay for their education start establishing a savings fund for their education. Some states like Florida offer great college savings programs, for example, the (Florida prepaid 529 Plan).
- Major Purchases: Once you have covered all your financial bases, and you still have a little extra money in your budget it wouldn’t hurt to start a major purchases fund. For those of you renting and the idea of owning a home sounds appealing, start saving up for your 20% down payment on your future home. If you already own home save for something to reward yourself for all the tedious penny pinching you have been doing. This can be used to buy a new car or maybe take a family vacation.
