Achieving financial freedom often requires a solid understanding of a few key financial truths. Yet despite the importance of financial literacy, many Americans lack the knowledge and skills necessary to make smart decisions with their money.
In fact, a report from the National Financial Educators Council revealed that on average, financial illiteracy cost Americans $1,819 in 2022. Meanwhile, 15% of those surveyed said their lack of financial know-how set them back by at least $10,000.
Unfortunately, most of us weren’t taught basic personal financial principles in school. Only recently have some states begun to require financial literacy education before graduation.
Since April is Financial Literacy Month, we thought it would be helpful to share a few important concepts that can help you build wealth and achieve your financial goals. By understanding and applying these financial truths, you can get your finances on track and set yourself up for long-term financial success.
Financial Truth #1: Compound Interest Is a Powerful Force
When you save or invest money, your interest earns interest, leading to exponential growth over time. Indeed, even small contributions can turn into substantial sums of money due to compound interest.
For example, suppose you invest $10,000 today. If your investments earn an average annual return of 6%, you’ll have just over $32,000 after 20 years. That’s more than three times your initial investment!
By starting early, contributing regularly to your savings and investment accounts, and letting the power of compounding work for you, you can build a sizeable nest egg for retirement. Plus, if you invest within a tax-deferred account like a 401(k) or individual retirement account (IRA), your money can grow even faster.
A compound interest calculator can help you see how quickly your money can grow if you save and invest wisely.
Financial Truth #2: An Emergency Fund Can Help You Navigate Unexpected Financial Setbacks
If you don’t have an emergency fund, you’re not alone. According to a recent Bankrate survey, more than two-thirds of adults say they’d be worried about having enough emergency savings to cover a month’s worth of living expenses.
Unfortunately, lacking an emergency fund means you may have to take on additional debt or tap into your retirement resources if you experience an unexpected financial setback. Both scenarios can be costly.
Since credit cards tend to have high interest rates, any balances you carry can grow rapidly—an example of compound interest working against you. Meanwhile, there may be tax consequences and/or penalties associated with early retirement withdrawals.
Consequently, most financial experts recommend saving enough cash to cover at least three to six months’ worth of living expenses. Having this cash readily available can provide peace of mind and keep you on track toward your long-term financial goals.
Financial Truth #3: Tracking Your Spending Is a Necessary Evil
Few people have the discipline to create and stick to a formal budget. Nevertheless, tracking your spending is essential for long-term financial success.
Indeed, you don’t need to earn a lot of money to achieve financial freedom. But one of the most important financial truths in life is that you must spend less than you earn.
When you know exactly where your money is going each month, you can identify opportunities to cut back your expenses and increase your savings. In addition, tracking your spending can help you:
- Prioritize your expenses. Tracking your spending can help you make more informed financial decisions and ensure your spending aligns with your values and goals.
- Avoid high-interest debt. When you’re aware of your spending, you’re more likely to live within your means so you don’t accumulate high-interest credit card debt.
- Plan for the future. Tracking your spending isn’t just about looking backwards. It can also help you develop a realistic plan to achieve your future financial goals.
Financial Truth #4: Your Credit Score Can Meaningfully Impact Your Financial Well-Being
Of all the financial truths, the importance of a strong credit score is one that many tend to overlook.
Depending on your financial goals, a strong credit score can save you thousands of dollars or more over the course of your lifetime. Not only can a strong credit score help you borrow money more easily, but it can also significantly lower the cost of taking on debt.
According to Experian, credit scores above 670 are good, while a score over 800 is excellent. If your credit score needs a boost, the following tips can help.
- Pay your bills on time. One of the most important factors in determining your credit score is your payment history. Make sure to pay your bills on time every month to avoid late payments and maintain a strong credit score.
- Keep your credit utilization low. Credit utilization is the amount of credit you use compared to your total credit limit. To keep your credit score healthy, experts recommend using less than 30% of your available credit.
- Don’t close old accounts. The length of your credit history is another important factor in determining your credit score. Closing old credit accounts can shorten your credit history and potentially lower your score.
- Monitor your credit report. Regularly monitoring your credit report can help you identify errors or fraudulent activity. You can request a free credit report from each of the three major credit bureaus once a year.
Financial Truth #5: “An Investment in Knowledge Pays the Best Interest” -Ben Franklin
Finally, prioritizing ongoing financial education can significantly improve your overall financial health.
Indeed, personal finance is a complex and ever-changing field. Yet by understanding key financial truths and principles, you can make better financial decisions and avoid costly mistakes.
There are many resources that can help you boost your financial literacy, including books, podcasts, and online courses. However, if you don’t have the time or energy to invest in financial education, consider partnering with an expert who can help you achieve your financial goals.
According to a recent report from Edelman Financial Engines, 83% of people who work with a financial professional say they’re less stressed about money because of the help they receive. At Benchmark Wealth Management, we believe this sense of security is the true value of expert financial advice.
To learn more about these financial truths and see if we’re the right fit for your financial planning needs, please contact us. We look forward to helping you develop a comprehensive plan to achieve your financial goals and aspirations.
This article is for educational purposes only and is not intended to be specific tax, legal, or investment advice.
Richard W. Stout III is managing director of Benchmark Wealth Management, LLC, with 25 years of experience in the financial industry. He specializes in financial planning and asset management for individuals, families, and institutions seeking to build and monitor durable and sustainable plans for their financial futures. Rick is a Certified Financial Planner™ professional and holds the Accredited Investment Fiduciary® (AIF®) designation. He obtained his MBA from Rensselaer Polytechnic Institute and his BA in Economics and Anthropology from the University of Connecticut. Rick has earned a Master of Science degree in Personal Financial Planning from the College for Financial Planning. He has extensive background experience in lending, credit review and analysis, and real estate and partnership management. Learn more about Rick by connecting with him on LinkedIn.
Thomas J. Britt is managing director of Benchmark Wealth Management, LLC, with 23 years of experience in the financial industry. He specializes in executive financial planning, retirement planning, investing, as well as the management of trusts and endowments. Thomas is a CERTIFIED FINANCIAL PLANNER™ professional. He holds the Master Planner Advanced StudiesSM, MPAS®, Certified Investment Management Analyst® (CIMA®), and Chartered Retirement Planning Counselor℠, CRPC® designations. Thomas earned a Bachelor of Science in Finance from the University of New Haven, an MBA in financial technology from Rensselaer Polytechnic Institute, and a Master of Science in Personal Financial Planning from the College for Financial Planning. He is also a proud veteran of the United States Navy Submarine Force. Learn more about Tom by connecting with him on LinkedIn.
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