Can you remember learning to read? For anyone under the age of 60, it probably started with “The Cat in Hat.” Its simple rhymes and fanciful illustrations helped millions of us master our first real book. Amazing to consider it, but with that cat, we became literate!
April is Financial Literacy Month, but many Americans find that understanding their finances and how they work is not nearly as easy or fun as reading a Dr. Seuss story. Perhaps it’s the numbers and calculations involved, or the inevitable legalese, small print and absence of pictures, that make financial literacy such a difficult skill. Nevertheless it is a matter of economic survival. If we do not know how the dollars work, we cannot get them to work for us to better our lives. As our favorite hatted Cat might say, “It’s fun to have money, but you have to know how.”
To recognize the importance of financial literacy, CFP Board has enlisted the creative genius of Dr. Seuss to help explain a few of the most essential concepts of personal finance. These concepts build on one another, like Yertle’s trusty turtles, to allow us to see the opportunities and possibilities for creating financial security for ourselves and our families.
Step with care and great tact
and remember that Life’s
a Great Balancing Act.
Balance is a fundamental concept of personal finance. Managing money requires balancing wants with needs, income with expenses, what you own and what you owe, return with risk. A common mistake that people make with their money is failing to understand this balance. They think their paychecks are entirely for spending today as opposed to saving some for tomorrow. Similarly, they may choose investments based solely on the promise of a given interest rate, or dividend, or possibility of gain, without considering the amount of risk they are taking with that investment. Or they may focus only on the risk of loss with an investment, not appreciating that some risk is necessary to growing their wealth.
Do you dare to stay out? Do you dare to go in?
How much can you lose? How much can you win?
Building on the principal of financial balance is the notion of “opportunity cost.” Whenever we make a financial decision based on its expected benefits, there is always a “cost.” Sometimes this cost is an actual amount we must pay, such as a fee or tax. But there is also the cost of other opportunities we cannot pursue as a result of making our decision. For example, if we splurge on a vacation this year, we might not be able to send the kids to camp. Opportunity cost can also be understood as other possible uses for our money. While those possibilities are limitless, it is nevertheless smart to think about several before making any big decision. What are the implications of “staying out” or “going in” – be it in the stock market or the job market or your employer’s 401(k)? What do you gain, and what do you stand to lose?
How did it get late so soon?
It’s night before it’s afternoon.
December is here before it’s June.
My goodness how the time is flewn.
How did it get late so soon?
Financial literacy is about more than money. Just as fundamentally, it’s about time. It requires understanding the ebb and flow of financial resources throughout our lives, and planning ahead today for what will be needed tomorrow. Too many Americans are now facing the November and December of their lives – their retirement years – and wishing they had done more preparation and planning while they were still enjoying June. Preparing a budget, getting the right insurance coverages, and having a plan for funding and meeting future financial goals is the way to move deliberately and confidently into tomorrow, rather than arriving not quite knowing where and how you got there. While time flies for us all, there’s a big difference between flying straight and careening all over the map. Those who have a financial plan have a much better sense of where time’s flight will take them.
And it should be, it should be,
It should be like that!
Because Horton was faithful!
He sat and he sat!
He meant what he said
And he said what he meant
An elephant’s faithful
One hundred percent!
Knowing how to find a trustworthy professional to help with personal finance is another important indicator of financial literacy. This isn’t necessarily easy, given the proliferation of credentials and designations used by the 300,000+ financial advisors in the U.S. Americans need to understand the basis of those credentials: how much education is required? What type of examination must be passed? What are the ongoing requirements for maintaining the certification? Does the advisor commit to a code of ethics? Not getting the answers to these questions can be as dangerous a form of “illiteracy” as is the inability to understand the differences between a stock and a bond.
Most important of all is the knowledge of a given financial advisor’s obligation to his or her client. Does the advisor, like Horton, take on a “duty of care”? Is he open and honest in what he says to clients or prospects, fully explaining the basis of his advice and disclosing any potential conflicts he might have?
Some financial advisors are held to these types of standards as a condition of their professional practice. CFP® professionals and Registered Investment Advisors are two such types of advisors. You can save yourself a lot of needless memorization of other names and letters by keeping your focus of these advisors for your financial planning and investment advice.
At CFP Board, we realize that becoming financially literate is not always fun or easy. But it is definitely empowering. Taking a first step, like signing up for a personal finance class or visiting www.letsmakeaplan.org to learn more about financial planning, can be the start of an amazing journey to financial security. In the words of Dr. Seuss:
The more that you read,
The more things that you know
The more that you learn
Oh the places you’ll go!