Financial literacy is: “The ability to understand financial choices, plan for the future, spend wisely, and manage the challenges that come with life events such as job loss, saving for retirement, or a child’s education.” [source: US Government Accounting Office]
Unfortunately, the education system of one of the wealthiest countries in the world does not teach children, teenagers, and young adults how to “understand financial choices, plan for the future, and manage money.” Here is some of the evidence according to several recent surveys:
-A little over 30% of US households (or more than 77 million Americans) do not pay their bills on time
-Nearly 40% of US households carry credit card debt from month to month
-Almost 60% of adults in the US say they have NO savings
-A little more than 50% of adults in the US believe it’s ok to default on their mortgage if they can’t afford to pay it.
It would appear from the survey results above that this same population is not learning the essential rules of the “money game” at home either. If you find yourself tiptoeing into the 30% to 50% of adults in America who are experiencing some sort of financial stress outlined above, then I encourage you to read on. My intention for this article is to help early-career nonprofit professionals get a handle on two basic “rules” of the money game that they can use to create a sound financial future.
Rule #1 – Have Adequate Insurance
First understand that financial literacy is a priority, not a dream. Your attention and focus on two aspects of financial literacy: 1) preparing for challenges and 2) investing for the future will help you create a strong foundation upon which a strong financial house may be built.
A financial foundation is strong when it can stand up to the inevitable untimely “earthquakes” that will rock the house. Those earthquakes include the possibility of sickness, disability, or death.
As a young professional, you may get married, choose to buy a condo or house, and start a family. By doing so, you are either consciously (or, unconsciously) taking on responsibility for the care of those people and dwellings. Unfortunately, life has the habit challenging your ability to honor the commitments you’ve made to yourself and your family. And, as an early career professional, you may not have the cash in the bank to deal with those challenges. That’s where different types of insurance can come in. For a fraction of the cost of the expenses associated with sickness, disability, or death, you can purchase affordable forms of insurance that shift the bulk of the financial risk (especially at a young age) to an insurance company.
Rule #2 – Invest for the Future
In the meantime, you can also take advantage at a young age of the compounding effect of interest by saving and investing relatively small amounts of money that will grow over time to provide cash when you are no longer working.
Here’s how it works. There is a wealth formula which consists of the following three factors:
- Rate of Return
The more money you save now (seeds) and invest (grow) creates a money crop that you can harvest at a later time. As Warren Buffet says, “Don’t save what is left after spending, spend what is left after saving.”
The more time you have for the money crop to grow, the greater your harvest will be at retirement. And, remember procrastination is the enemy of wealth creation. May young professionals think they have lots of time to save. Then they get married, have kids, and buy a house. With a mortgage and new expenses, money becomes tight. They tell themselves they will start saving later.
That’s a mistake because mid-life comes along and the children go off to college. Tuition takes a big bite out of the budget. Soon when they realize they must save, but now they say it’s too late. They wonder: what if they had just put aside $100 or $200 a month when they were younger?
Another factor in growing this money crop is called “The Rate of Return.” The rate of return has to do with how fast and large (or slow and small) your crop grows. In financial literacy, we frequently talk about the Rule of 72. Take the number 72 and divide it by the rate of return to get the number of years it takes to double your money. For example, if you put money in a savings account with a 1% rate of return, it will take you 72/1, or 72 years to double your money. On the other hand, if you invest your savings in an account that yields an 8% rate of return, it will only take 9 years to double your money.
An illustration here may be helpful. Let’s assume you and your colleague Barbara are two young nonprofit professionals starting out on your careers at the same age. You both are aware that saving for retirement is important and decide to save $5,000 in your first year of employment. You invest in an account with a 4% rate, and Barbara invests at 12%. In about 50 years, you will have $20,000 to spend in retirement, while Barbara will have $320,000. You end up having to sleep on the pull-out couch when you visit Barbara at her seaside condominium.
Take actions to learn and build a solid financial foundation
Young non-profit professionals can get insurance and start to accumulate savings today. As a young professional, health, life, and disability insurance premiums are modest. Also, if you choose to put away $10 a day and invest those funds in an account that yields an 8% return on investment, over time those savings will grow to nearly $450,000 in 30 years. Don’t wait. Start to save as much as you can, as soon as you can. Start saving NOW!
Lupei Dilena is a financial service expert who helps empower professionals to build their financial life. Through her network, she offers free financial literacy workshops to help young adults learn about how money works, get them into action for financial freedom and help them set up solutions to build a solid financial foundation.