Family Finances Archives

How Much Does it Take to Be Wealthy?

The coronavirus pandemic has certainly shaken almost every aspect of the lives of Americans. The stay at home orders, high unemployment rate and volatile market have many people thinking differently about the value of their money than they did before COVID-19 erupted in the country.

A survey conducted by Charles Schwab in January of 2020 regarding financial stability asked participants what it took to be financially comfortable, and survey participants cited an average of $934,000 in net worth. This number shifted down by 30% in June, to $655,000.

What is considered to be wealthy changed exponentially as well. Respondents stated that $2 million in net worth today is considered wealthy, down by 23% from $2.6 million in January. In 2019, respondents said it took $2.3 million to be wealthy, down slightly from $2.4 million in the two prior years.

Americans’ attitudes about money play a role in their overall happiness, but when asked about the most important factor to their overall happiness today, survey respondents regarded those drivers in the same order as before the coronavirus outbreak:

Relationships – 39%
Health – 27%
Money – 17%
Lifestyle – 14%
Career – 3%

After months of stay-at-home orders and a change of lifestyle, the coronavirus pandemic has vastly impacted the way we think about the value of money. 57% percent of respondents said the coronavirus has financially affected them or a close family member.

At the same time, many respondents mentioned that they are more likely to start saving in general than they did before the pandemics onset. The need for an emergency fund is now more important to many than ever before. Others said they are much more likely to consider hiring a financial advisor to set up a strong financial plan.

If the coronavirus pandemic has impacted your finances or you are uncertain about your financial plan, please reach out and we would be happy to help you find a plan that works for you. If you have any questions, contact us at info@shermanwealth.com and we will answer any questions you might have.

Here’s How to Prepare your Finances

With the additional $600 per week unemployment benefits coming to an end this week, it is important to think about the ways in which you can prepare your finances for the months ahead. Many Americans are currently jobless and have been relying on these additional COVID-19 related unemployment benefits. There is much uncertainty as we navigate through the pandemic the best we can, but there is great value in coming up with a plan to start saving and getting your finances in order as your benefits may decrease in the coming months.

Here are some key ways to be prepared for your future and what you should expect as any additional unemployment relief comes to an end.

Adjust your Budget

A great place to start in uncertain times is with your budget. Sit down and attempt to cut out all unnecessary expenses along with looking into other options that may be cheaper. It’s important to think of all your essential monthly costs and see where you can save a buck or two. For example, take a look at your housing, food, utilities, and car payments to see if there are places you can cut down. Also make sure to take a look at bank and credit card statements to cut out those annoying hidden fees or unnecessary charges such as ATM fees. Also, think about selling items you may not use anymore for some extra cash.

Contact your Creditors

If you have not already called your creditors, you should consider reaching out to them and discussing your options moving forward. If you are only able to pay the minimum payment on your credit card bill, make sure to let your creditors know so they can figure out a plan and help you out. Many creditors may be able to offer you “financial hardship assistance” so that you can keep your credit in good standing even if you can’t pay more than a certain amount each month.

Build an Emergency Fund Even if You Don’t Think You Can

We all know it’s important to have a cash cushion, especially in times of economic crisis. However, it can be difficult to think about how to build one when you are already strapped on cash. But, it’s never too late to start saving. The first step is to start reducing any debt. You should also try to put yourself into a “saving mindset” by incrementally setting aside a small stash of cash every month. You can contact your bank to set up auto payments to your savings account each month, which will help you get consistent with your saving habits.

Expect a Drop in Your Credit Score

While it’s important to maintain a strong credit score, in times of financial crisis it is okay to expect a drop in your score. As mentioned above, make sure to give your creditors a call to keep them in the loop about your situation. Also, if you are unable to pay your credit card balance in full, at least pay the minimum amount to keep your credit stable.

Understand Your Costs

When you are strapped for cash, it is important to know which bills you should be prioritizing, for example, housing payments. While the additional unemployment relief is ending, so are the eviction moratoriums. Make sure to do some research and have a conversation with your creditors, landlords, and banks to fully understand the regulations and rules associated with your payments.

Get Creative and Seek out Resources

Our current environment is a new adjustment for everyone, so don’t be afraid to seek out help even if you never have before. Your local city and state government offer information and resources ready to help you. When the additional coronavirus unemployment relief runs out, you may be able to qualify for government programs such as SNAP, Medicaid, and HEAP, according to CNBC. There are also many charities and organizations that are doing their best to help out those in need.

Ask your friends and family for advice and we encourage you to seek out a financial advisor for guidance and clarify on your financial situation. If you have any questions or are uncertain about the future of your financial life, we are happy to help you in any way and help you figure out your financial future. Please contact us to schedule a free 30 minute consultation.

5 Ways to Manage Your Finances Under COVID-19

Managing your finances isn’t simple. Throw a global pandemic into the mix and you might be finding yourself overwhelmed and unprepared for the future. Now is the time to self-educate and start finding ways to manage your money for both the short and long-term.

Here are a few tips on how to manage and improve your financial situation during the coronavirus pandemic.

Focusing on building savings

While it is always important to invest and allow your money to compound, it is crucial to focus on building up your savings account to ensure you have a cash cushion for a rainy day, or in our case, the coronavirus pandemic. While you may be currently saving around 20-30% of your income, right now focus on investing 10% of your income towards a long-term goal, such as your retirement plan.

Spending money on take-out/delivery, and supporting local businesses

As we approach the beginning of July, finally entering country-wide re-opening stages, it is still important to be supporting local businesses who have suffered a beating these last few months. Ordering takeout/delivery is a great way to mix up your daily meals and give your kitchen a break, while also stimulating the economy.

Building a larger emergency fund

As mentioned earlier, it is crucial to have a cash emergency fund to be able to cover around 6 months of living expenses. No matter your job, we see how great of an impact unprecedented global events can have on our economy, so knowing you have a few dollars in your pocket is a great reassuring measure to take.

Buying Comfort

As we slowly begin to reacclimate into our daily routine, it is important to put our spending into perspective. While there is nothing wrong with retail therapy, there are ways to make online shopping less expensive. Make sure to use free browser extensions to get cash back on your purchases. Also, if you always pay your full credit card balance monthly, you can use your credit card to accumulate miles and points. Lastly, remember to ask yourself if your purchase is necessary and worth it before submitting your order.

Giving more

Now more than ever, it is important to give back to the community and help those who are less fortunate. If you are in a stable financial situation, remember to help those around you by directing your extra income towards donating to charities and organizations you strongly believe in.

By re-evaluating your financial situation and altering the ways you use your money, you can set yourself up for long-term financial success. Consider speaking to a financial advisor before making any big changes to your current financial plan. We offer a 30-minute complimentary financial consultation for those who have questions or concerns about their personal situation and how we may be able to assist you. If you have any questions on your current situation, please contact us and we will be happy to help you!

Bullet Journaling Your Way Toward A Budget

Many of us have tried to create a budget and stick to it at least once. Some people choose apps on their phone or spreadsheets on the computer to help them complete this task. But, for those who prefer a more creative approach, a better option might be bullet journaling. Bullet journaling is an organized system that helps people kickstart their to-do lists, stay on track with goals and switch up their approach to keeping their personal finances in order.

How Does Bullet Journaling Work?

Bullet journals can look like basic line writing, or you can add color and design elements to make it fun and attractive. Regardless of what you want to create, it’s most important to make your journal exciting enough to stick with. Your bullet journal should be customized to your liking in order to help you meet your goals.

How Can Bullet Journaling Help You Reach Your Goals?

Bullet journals are an all-in-one way to keep track of your expenses and reach your goals. It allows you to keep a record of:

Your financial goals
Your spending habits
Miscellaneous observations you have made about your money habits

Being able to actually see everything in writing and holding yourself accountable makes it much easier to keep track of how much you’re spending, what types of items you’re buying and how other factors (like your mood) could be affecting your money habits.

How to Use Bullet Journaling For Finances

While bullet journaling can be used for anything from tracking sleep patterns to weight loss, dream journaling or tackling your daily to-do list, there are a few ways you can use a bullet journal to develop a better budget.

Plan for Upcoming Purchases or Trips

If you’ve been wanting to make a big purchase or splurge on an upcoming event, use your journal to keep track of how much you need to save. If you are planning for a vacation, find out the cost of flights, hotels, food, etc. and start putting aside money for that. If you are looking to purchase a new car, you can keep track of what your monthly payments would look like based on what the loan costs might be. Drawing a visual representation of what you’re saving for can help make your goals feel more tangible. As you set money aside, you might want to include something in your journal that you can color to visually show how much you have saved.

Track your Monthly Expenses

According to a recent survey, only 14 percent of respondents used cash to pay for everyday purchases.1 Using credit or debit cards for most of your purchases can add an extra challenge when it comes to budgeting since it is an easy way to lose track of how much is being spent.

If you still prefer to avoid cash for your purchases, use your bullet journal to track your credit/debit expenses at the end of each week or month. You should create a list of how much money was spent and what it was spent on. You can also get creative and draw graphs symbolizing certain categories (food, gas, eating out, entertainment, etc.). Having a visual tool to compare what you’re spending and what you’re saving can be an eye-opening way to reassess your budget.

Pair it With Your Favorite Financial App

If you’re interested in using a budget tracking app, you can always pair your bullet journal with an app like Mint or YNAB. Apps can be more useful in immediately alerting you to overspending and help you budget in real-time. While journaling is still great for reflecting on your spending, an app can help keep you more accountable upfront.

Bullet journaling is a simple way to get your finances in order and it can make staying on track much easier. It provides a way for you to outline what needs to be done in order to accomplish your goals and allows you to constantly remain mindful of your expenses. If you need any assistance in starting your own budget journal or have any questions relating to your future financial goals, please feel free to contact us – we are here to help!

4 Financial Red Flags When Dating Someone New

It might seem strange to talk about finances when you first start dating someone new. People often try to overlook financial issues when embarking on a new relationship as it can be uncomfortable and awkward to discuss. However, if you see a future with that special someone, it’s important to know what kind of financial baggage they might be bringing with them and to be aware of any potential financial red flags.

Red Flag #1: Having Different Approaches to Saving

If your partner is a spender and you are a saver, this could be your first major red flag. It is critical that you both discuss your savings plans and goals in detail. If you share accounts or credit cards, you don’t want one person spending more than their fair share since this would not only negatively affect your savings goals, but it can also create a power struggle over financial control. It’s important to discuss how much money you’re okay spending on certain items and creating a budget that will help you compromise to meet your financial goals. It may be best to keep your finances separate for now, however, if you’re still unable to reach an agreement.

Red Flag #2: Not Discussing Your Credit Scores

Disclosing your credit scores is a must. Depending on what your partner’s credit score is, it could diminish your chances of getting a house together or making any other big purchase in the future.

Red Flag #3: Neglecting To Address Debt

It is essential that you know what debts your partner may have accumulated and how they plan on handling them. If you’re still getting to know one another, they may not be comfortable divulging the actual amount. You should, however, have a good understanding of whether or not they’re paying it off responsibly and spending wisely.

Red Flag #4: Not Sharing the Same Financial Goals

While the relationship is still fairly new, you should outline what your end goals are. It is important to ensure your financial goals are aligned early enough in the relationship to avoid any future disappointment.

The excitement of any new relationship might cause you to overlook some major financial red flags. But when the time is right, it’s important to address these issues (preferably sooner rather than later) – especially if you’re both in it for the long haul. If you encounter any of these red flags in your relationship and have any questions regarding your finances, please contact us – we are here to help!

National 529 College Savings Plan Day

Today is Friday, May 29 which means it’s “529 Day” or “National 529 College Savings Plan Day”. Each year, National 529 College Savings Plan Day draws awareness to the tax-advantaged way of putting money away for education costs. To help ease the burden of student loans, some parents put money aside each year for their children’s education. 529 plans have grown in popularity over the years, however many people still remain unaware that 529 plans are even an option for education savings.

So, what exactly is a 529 plan? 529 plans, also referred to as “qualified tuition plans,” are tax-advantaged savings plans sponsored by states, state agencies or educational institutions. Earnings are federally tax-exempt and most states exempt earnings from state income tax.

There are two types of 529 plans: Prepaid tuition plans and education savings plans. Both can be used as a way to save for a child or beneficiary’s education, but differ in their methods.

Prepaid tuition plans allow people to purchase units or credits at higher education institutions at current prices to be used in the future by the beneficiary. The credits are purchased for participating colleges or universities, which are usually public and in-state. However, it may be able to be used for an equal payment to private or out-of-state institutions.

The second type of plan is an education savings plan. It serves as an investment account that can be used for future qualified higher education expenses. Similar to a Roth401(k) or Roth IRA, plans offer several investment options and funds will rise and fall based on the investment’s performance. Generally, the accumulated funds can be used at any participating college or university, regardless of its location. You can also use up to $10,000 to pay tuition at elementary or secondary schools.

The ways you can spend this saved money differs based on the plan. Prepaid tuition plans can be used for tuition and mandatory fees, but not room and board. Education savings plans, however, can be used for tuition, fees, books, supplies, equipment, computers and sometimes room and board. Technically, a person can use the funds accumulated in an education savings plan for any expense they choose, but if the funds are used for a non-qualified distribution, they are subject to income tax, a 10 percent penalty and any additional state penalties. If a beneficiary doesn’t need the funds, they can be withdrawn with the payment of income tax and penalties, although there are exceptions to the penalty fees.

529 Day is a great time to review your college savings progress and if you haven’t started saving for college yet, it’s not too late! Some states currently have different contests and incentives to try to boost interest and participation in their 529 savings programs. Click here to see what your state might have to offer. If you have any questions about 529 plans or would like us to help set up a plan for your beneficiaries, please contact us – we’re here to help!

Ways To Build Wealth And Boost Your Savings While You’re Stuck At Home

We’re all spending more time at home these days and it’s likely that money and finances are a stress for many during this pandemic. As the markets continue to be extra volatile, many people are feeling a lack of control when it comes to their money. Even though there isn’t much we can do about the state of the overall economy, there are some small-scale things you can do right now, from the comfort of your own home, to help you feel more in control of your finances. If it is all you can do right now to keep up with your bills, that should continue to be your main priority. However, if you’re in the fortunate position of having an income or some extra cash, the following tasks take 30 minutes or less and might just have you feeling a little better about the state of your finances.

REVIEW YOUR BUDGET

Every solid financial plan starts with a good budget, and now is a great time to go over yours. You should review your spending habits and try to determine which areas of your spending are relatively fixed — such as monthly rent and insurance coverage — and those that are discretionary, like your lattes, subscriptions and eating out.

Since you’ll likely be spending a lot of time at home this month, most of your convenience purchases will probably trail off. Comparing last month’s expenditures to this month, you will see where you are spending your money and you will be better positioned to make changes to your spending habits in order to prioritize saving money and spending on what you deem essential for your household.

GET SPECIFIC ABOUT YOUR FUTURE

Write down all the things that you want to do in your future – you can do this by yourself or with a significant other. Break it down into five-year segments. What do you want to do, where do you want to go, and what do you want to accomplish during each five-year segment? If you have career goals that include starting a business, making more money, or changing your job, you might need to learn some new skills to start down that path.

Being confined to our home offices gives us a great opportunity to focus on learning something new and developing plans for the next steps in life, whether it is signing up for an online class or doing some research on what it might take to take your career in another direction.

SET UP A 529 COLLEGE-SAVINGS PLAN FOR YOUR KID(S)

If you’ve been considering a college savings plan for your child, setting one up online is quick and easy. You should start by reviewing the 529 plan options where you live, since they often provide tax benefits while you save for your child’s college education. Just remember to keep your own future financial goals in mind, as well. Saving for your children’s education is very important, but should come second to saving for your own retirement.

REVIEW YOUR BENEFICIARY INFORMTION

You should make a list of your financial accounts that include beneficiary designations — like your IRA, 401(k), or life insurance — and make any necessary beneficiary information adjustments. Since these designations determine who will receive your account upon your passing, if they are left blank or not updated, your wishes could be ignored and assets could go to an ex-spouse, or state law could become applicable and decide how to split your accounts.

SET UP A NEW SAVINGS ACCOUNT

Now is the perfect time to set up a separate online high-yield savings account for your specific goals, whether it be for a vacation, saving for the holidays or possibly a new car. To make things even easier, you can also set up a direct deposit so that you put a little bit away from each paycheck towards that objective. However, remember that these “extras” should take a backseat to your emergency fund. Having three to six months of expenses set aside in a money market or high-yield savings account can provide peace of mind and can be a lifesaver in times of temporary job loss or medical costs.

DO SOME BOOKKEEPING

Now might be a good time to do some overall bookkeeping. This can include reviewing your insurance policies to see if you still have sufficient coverage for your needs, or working on your estate plan (are your medical directives all updated?). If your kids are old enough, this could even be a good opportunity to teach them how to balance a checkbook by showing them how you do yours.

EVALUATE YOUR INVESTMENT PORTFOLIOS

If you have money in the market that’s earmarked for retirement, you might be a little worried about how current events will impact your goals. Now is a good time to have a call with your financial planner to determine if your portfolio is still meeting your long-term goals, or if it needs to be adjusted based on current events.

Even though we may not have expected to be spending this much time in our homes over the past few months, it’s important to take advantage of the time while we can. These unprecedented times have given us the opportunity to slow down and focus on our families, as well as other important aspects of our lives like our finances. Taking just a half hour each day or week to go over these tasks can help us to feel more in control and less stressed about our money as we deal with the uncertainty of the times. As always, if you have any questions about any of the suggestions above or any other concerns about your finances, please contact us. We are here to help and we are all in this together!

Inheriting Money Attitudes – Are Financial Habits Learned?

Whom we become as adults is largely influenced by how and by whom we are raised. Our parents shape us in many ways. If you are given chores as a child, you are more than likely to become an independent worker as an adult. If you live in a house where there are lots of arguments, you are more likely to struggle to form healthy relationships on your own. As we consider that these types of characteristics are often learned as we grow up, does how we are raised also impact our finances? A recent survey gives us a better understanding of how certain financial upbringings can shape our money attitudes as adults.

EARLY INFLUENCE

According to over three-quarters of those surveyed, parents influenced their financial habits as adults and those in good current financial standing were the most likely to have had some parental influence at an early age. Those with bad financial standing also claimed that their parents influenced their financial habits.

For some reason, many parents shy away from money conversations with their children, even though it could have a positive influence on their financial habits. Over half of those surveyed said their parents never talked to them about the value of their financial accounts or life insurance or whether they had investments or debt. If these topics were discussed, it typically wasn’t until the children were adults themselves. Of the parents who did talk to their children about money, it was most commonly about their general financial standing and occurred around age 15.

FINANCIAL EMERGENCY DISCUSSIONS

Research suggests that talking to your children about the scarier side of money can be quite impactful. Respondents whose parents talked to them about the possibility of financial crises or recessions as children were more likely to be in good financial standing as adults. A key component of financial security is having cash resources you can tap in case of a financial emergency. This is why it’s important to talk to your children about financial crises or recessions, like the “dot-com bubble” that changed the way many baby boomers viewed investing, or the Great Recession that scarred millennials. Now, the COVID-19 global pandemic is likely to have a similar impact on Generation Z. Discussing these worst-case scenarios increases the likelihood that your children will plan ahead with an emergency fund as adults.

PRINCIPLES FOR FINANCIAL STABILITY

Teaching your children financial life lessons could reduce the possibility of entering into credit card debt. According to our respondents, people whose parents taught them basic financial life lessons had less credit card debt than those whose parents didn’t teach them anything about money. The most common financial lesson parents taught their millennial children was the difference between a need and a want. Despite having received the most financial education from their parents, millennials reported the highest instance of being worse off financially than their parents. However, the majority of millennials thought they would eventually be better off than their parents. Their financial optimism may be due to the fact that nearly one-third of millennials received a pay raise in the past 12 months.

The least commonly imparted financial lesson for all generations was how to invest, which is unfortunate given those whose parents did teach them how to invest typically reported having the highest income and estimated net worth. When it comes to gender, parents were especially negligent in discussing investing where their daughters were concerned; men were 35% more likely than women to have been taught to invest. Men were also more likely to have been taught about financial goal setting. One reason for the discrepancy could be that mothers are more likely to teach their daughters about finance, thus causing traditional gender roles to get passed down from generation to generation. However, when it comes to generational changes, many millennial women have made strides in income and now earn more than their mothers.

SPENDING STYLES

The survey results suggested a connection between parents’ spending style and their children’s style. The more responsible a parent is with his or her spending, the more likely their children are to be responsible spenders themselves. Over half of respondents whose parents only spent money when they could afford it reported being debt-free today, compared to only 42% of respondents whose parents often spent beyond their means. Children whose parents were conservative spenders, often choosing to forgo luxuries even when they could afford it, were the most likely to have an emergency fund as an adult and children whose parents only spent when they could afford it were slightly less likely to have emergency funds as adults. Having a parent who often spent beyond their means can lead to more debt and less in emergency funds, but the majority of children brought up in such households said they’ve done better for themselves as adults. Children of responsible and conservative spenders were far more likely to emulate their parents’ spending habits as adults.

CREATING A BETTER FINANCIAL FUTURE

How we raise our children has a formative impact on who they become as adults. If you teach them how to save and invest, they are more likely to become financially responsible adults. A financial education should be a key aspect of any child’s upbringing. It is important to facilitate healthy conversations about money with our children so they are prepared for the important financial life lessons as they grow up. Teaching key financial tools to our children will enable them to budget, manage their finances and plan for their futures as adults. If you have any questions relating to teaching your children about early financial habits, please contact us – we are here to help!

How Much Money Do You Actually Need in America?

Sherman Wealth Management | Fee Only Fiduciary

In my line of business, we talk a lot about wealth management. The idea, of course, is that financial planners and wealth managers assist you in creating a road map for your money that helps you grow savings for lifestyle goals like retirement, purchasing a home, or sending your kids to the college of their dreams. The term “wealth management” often begs the question: What does “being wealthy” mean? And when do you need a financial planner to help you manage your wealth?

How Do People View Wealth?

A recent study has shown that the definition of being wealthy rises as people age. Bloomberg states that Boomers tend to view $2.4 million as a requirement to be “wealthy” whereas millennial’s view wealth as a $2 million requirement. That’s a fairly large discrepancy – and it’s pretty clear what’s causing it. The younger we are, the more likely we are to view our financial future with a sense of optimism. We also tend to be more short-sighted in our financial planning, and believe that a smaller amount of wealth will last longer.

As we age, we become more realistic about our finances. We start to see the big picture, and that honest truth is that we often need a lot more money than we realize.

What Does Wealth Mean to You?

Despite the discrepancy in what quantifies “wealth” among generations, one thing stays the same: people view wealth as several consistent things. They believe that wealth is:

Options
Freedom
The ability to stop worrying
A secure future
Caring for yourself and your loved ones

Many people also say that being wealthy equates to taking time for themselves in their daily life. According to the same survey, the majority of millennial’s believe that they will be wealthy in the future. However, the same optimism doesn’t translate to Boomers and other generations.

The Importance of Saving

The key to building wealth is saving a lot, and saving early. The sooner you can start to prioritize saving in your budget, the sooner you can begin to take advantage of compound interest. I’ve discussed this in previous blog posts, but to review:

Compound interest is essentially a snowball effect. As a snowball rolls down a hill, it grows in size. Even if you start with a small amount of money invested, it picks up more and more snow with each revolution. By the time you reach the bottom of the hill, the snowball has grown significantly, and will continue to grow faster the more you have invested.

This demonstrates the importance of saving early on in your financial life. Although many millennial’s feel positively about their opportunity for wealth, they won’t be able to capitalize on these goals if they don’t prepare now.

The Importance of a Financial Plan

This wealth study by Bloomberg also indicated that most people, unsurprisingly, felt more secure in their finances when they worked with a financial advisor on constructing their financial plan. Many millennials have yet to employ their own financial advisor, and it’s time to rethink that trend.

At Sherman Wealth, many of my clients are millennial’s. I enjoy working with families and young professionals to both clearly define their goals and help them build a plan that moves them in the right direction. When advisers have the opportunity to work with millennial’s to grow their wealth, they have a leg up on pre-retirees who focus on financial planning as they near retirement: time.

When you implement a financial plan early in life, you have time on your side. With time, your wealth can grow significantly, and working with a financial adviser can help you make the right money moves early on to set yourself up for success in the long run.

Are You Ready?

In my recent video reviewing MarketWatch’s article on what you need saved for retirement by the time you’re 35 years old, I stressed the importance of saving early. It’s critical to start growing your wealth, even as a millennial who has many years until retirement, through targeted savings and a smart investing strategy. The critical thing to remember is you’re not just saving for retirement – you’re saving for all future goals like buying a house, sending your kids to college, or living well throughout your life. Saving is truly the only way to ensure wealth in your future, which means that saving is the only way to ensure options, freedom, and a lack of worrying about money as you age.

If you’d like to discuss your saving strategy, schedule a consultation today. Building a comprehensive financial plan that prioritizes saving while mitigating the impact of taxes and investment fees is key to growing your wealth and building a financial future you can rely on, and I’d love to help.

Teaching Children Financial Responsibility: Start Early

close up of family hands with piggy bank

Would it surprise you to know that students graduating from high school enter college with little to no knowledge about their finances, how to budget, or save for their futures? The problem has become so severe that 40% of these students wind up going into debt in order to fund their social lives and 70% of these students wind up damaging their credit ratings shortly after college graduation.

Unfortunately, it seems as though this debt will not be going away anytime soon. The average student loan debt for the class of 2016 increased by 6% from the previous year and the financial literacy rate in the U.S. has not improved over the past three years. While college enrollment and the number of college graduates has continued to increase, financial literacy lags among these young people at record lows. Where does this disconnect come from?

Few states offer personal finance or economics courses and even fewer states test students on the financial knowledge they have acquired. It therefore comes as no surprise that American students (and we can infer American adults) have one of the lowest levels of financial literacy when compared to other countries. While the number of student loans has increased,

44% of Americans don’t have enough cash to cover a $400 emergency
43% of student loan borrowers are not making payments
38% of U.S. households have credit card debt
33% of American adults have $0 saved for retirement

Why does it matter? How is it affecting the economy?

Students are graduating with loans they can’t afford to pay back and with minimal financial knowledge in planning for their futures. According to Student Loan Hero, Americans have over $1.48 trillion in student loan debt, which is more than double the total U.S. credit card debt of $620 billion. This debt is becoming a major barrier to home ownership. 43% of student loan borrowers are not making payments and most of these individuals do not have any savings. A lack of sound financial knowledge will affect the economy as these millennials enter the labor force burdened with student loans.

As parents, we play a vital role in educating our children about the importance of personal finances. In the Sherman household, we are teaching our children the importance of finances on a daily basis. Our 4 year old son is learning about savings by doing chores in return for an allowance, which he saves in his piggy bank. He is learning to save and spend his money wisely.

Parents can begin educating their children at home in order to increase the financial literacy of their kids. By demonstrating wise financial habits, parents can serve as role models for their kids. Talking in an age appropriate way to your children about the dangers of debt and the importance of saving a portion of any money they earn instills financial values and lessons your child can use throughout life. You may find that using an allowance is a way that you can teach your kids about saving and spending appropriately. Since it has been shown that kids who manage their own money have been found to demonstrate better financial habits in the future, giving your kids the opportunity to spend and save their own allowance or money earned is a good way to prepare them for later on. Even a simple trip to the store can be used as an opportunity to start the conversation about the danger of credit cards and how they should only be used in an emergency. Educating your kids at an early age will enable them to better learn and practice sound financial habits while under your watchful eye and cause them to be less likely to make irrational decisions once they are out on their own.

This issue is not only affecting students and young adults. Many professionals with advanced degrees have spent countless hours studying and researching information in their particular field. Despite all of the hours spent earning their degrees, many of these people have never taken a single course in financial education and are surprisingly not prepared to deal with the important financial decisions affecting their futures. As a result, many extremely smart and successful people are making critical financial errors which can negatively impact the amount of money they have saved upon retirement.

Beginning in 2011, studies were conducted where participants were shown a computer generated rendering of what they might look like at their age of retirement. They were then asked to make financial decisions about whether to spend their money today or save that money for the future. In each study, those individuals who were shown pictures of their future selves allocated more than twice as much money towards their retirement accounts than those who did not see the age-progressed images. Seeing the images gave the participants a connection with their future selves that they did not possess before. As a result, their spending/saving behavior changed dramatically because “saving is like a choice between spending money today or giving it to a stranger years from now.”

The benefits of educating your children about the importance of personal finances are undeniable, and you’ll be able to set them up for a promising future and help them prepare for retirement. Visit us online for more information about how we can help improve your financial life.

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