What You Need to Know
- To manage money, households need to know what they think is important.
- They also need to know what they have.
- Knowing where the holes and the traps are could help, too.
Education is a cornerstone of American culture. For generations we have made obtaining a better education for our children, including obtaining a college degree, a part of the American dream. This effort to fully educate our children has fallen short in one essential area of life — personal finance. America has a learning deficit when it comes to money matters with only 20 states having the foresight to mandate the taking of a personal finance course prior to graduating high school.
The impact of this lack of formal education and training can be seen with Americans leaking their valuable cash in numerous places, including:
- Poor financial literacy test scores
- The lack of formal, written financial plans for the majority of households
- A significant percentage of households working without a cash budget
- Low levels of emergency savings
- Underinsurance for life, property, health and income protection
- Low levels of retirement savings
- A reliance on debt to make ends meet each month
- Large amounts of student loan debt incurred that doesn’t qualify individuals for reasonably paying jobs.
- These are just some of the financial realities I see every day. To help households become financially successful, Americans need better access to help — they need professional money advice. America won’t overcome its lack of financial knowledge for the foreseeable future, the gap is just too big.
Yet, as I look around the financial services industry and the regulatory framework in place, it seems to me that we continue to take actions that limit access to advice, rather than expand it. It is time we really focused on improving access to financial advice for Americans.
The Importance of Financial Advice
Why is advice so important? Working with households financial planning helps determine short and long-term financial goals and helps create a balanced plan to meet those goals. The key elements involved in creating a comprehensive financial plan usually include:
1. Determining Financial Values and Goals
Households can’t manage their money and create a plan until they:
- Have established financial values, including the role money plays
- Spent time improving their basic knowledge of personal finance
- Understand their life goals (e.g., when they want to buy a home or how much college education support they want to provide their children) and expected timing.
2. Taking a Personal Financial Inventory
Households need to make a list of all of their assets (bank and investment accounts, real estate, valuable personal property) and another list of all of their debts (credit cards, mortgages, student loans). This essential starting point creates a better awareness of money matters.
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3. Creating a Cash Plan or Budget
Households need to have a cash budget or plan in place that clearly shows inflows and outflows. This forms the foundation for saving and investing actions they will plan for their future.
4. Developing a Debt Plan
Households need to develop the actions to reduce the amount and carrying cost of that debt through possible refinancing, restructuring or aggressive repayment.