The Most Valuable Financial Asset You Will Ever Have | Importance of Financial Literacy/Intelligence

Summary

This video emphasizes the importance of financial literacy in today's world, particularly for those who didn't receive sufficient financial education in school. The speaker outlines the benefits of becoming financially literate, including improved decision-making and wealth-building. Through an example comparing two couples with different financial strategies, the video demonstrates how smart financial choices, like minimizing debt, investing early, and managing expenses, can drastically impact long-term wealth. Ultimately, the video encourages viewers to take control of their financial education to secure a brighter financial future.

Takeaways

• 💡 Financial literacy is crucial but not always covered in school, though it's improving over time.
• 📚 People can learn financial literacy through blogs, podcasts, YouTube, and other self-education outlets.
• 💸 Financial literacy means understanding and making effective decisions about your finances to achieve your goals.
• 🛠 Self-education on finance through reading, classes, and videos can positively impact your financial future.
• 📊 The average American household spends large amounts annually on housing, transportation, food, and healthcare.
• 🚗 Making conscious financial choices, such as buying used cars or attending community college, can lead to significant savings.
• 💰 The power of financial literacy can compound over time, leading to better wealth accumulation through strategies like smart investments and budgeting.
• 🏡 A real-life example showed that a financially literate couple (John and Jane) ended up with 5x more net worth than a couple who didn’t practice financial literacy (Bill and Mary).
• 📈 By taking the time to learn about money and make informed decisions, people can set themselves up for financial success and a comfortable retirement.
• 🎯 The story highlights the importance of starting financial planning early and using tools like investments, side hustles, and savings for long-term wealth.

Q & A

Why is financial literacy considered important in today's world?

Financial literacy is essential as it equips individuals with the knowledge and skills to make informed financial decisions, leading to better financial stability and success in achieving personal goals.

What is the basic definition of financial literacy?

Financial literacy is the possession of skills and knowledge that allow an individual to make effective and informed financial decisions to manage and grow their financial resources.

How can someone become financially literate if they did not receive financial education in school?

People can become financially literate by learning from various resources outside of traditional education, such as books, blogs, podcasts, videos, and online courses focused on financial topics.

What are some areas of spending that an average American household budget covers?

An average American household budget includes housing, transportation, food, healthcare, personal care, clothing, entertainment, and insurance.

What financial differences exist between Bill and Mary and John and Jane in the example?

Bill and Mary take on more student debt, buy new cars, and don’t have additional side income, while John and Jane reduce college costs by attending community college, buy used cars, have a side hustle, and strategically invest, resulting in a significantly higher net worth.

What role does investing play in John and Jane’s financial strategy?

Investing is crucial for John and Jane as it enables their money to grow over time through compounding. Their early start and additional income streams mean they accumulate significantly more wealth by retirement.

How does choosing a 15-year mortgage benefit John and Jane in comparison to Bill and Mary?

A 15-year mortgage allows John and Jane to pay off their home faster, reducing long-term interest costs and freeing up money for additional investments or other financial goals.

What is the impact of side hustles on John and Jane’s financial progress?

Their side hustle provides extra income, which helps reduce their debt faster and increases their ability to save and invest, boosting their financial position over time.

How does financial literacy contribute to achieving a higher quality of life and financial security?

Financial literacy allows individuals to make better choices regarding spending, saving, and investing, leading to a more secure and comfortable lifestyle, with fewer financial stresses and more opportunities for wealth-building.

What is the '4% rule,' and how does it relate to John and Jane’s retirement?

The 4% rule is a retirement guideline suggesting that retirees can sustainably withdraw 4% of their retirement savings annually. For John and Jane, their $4.5 million portfolio would allow them to withdraw $180,000 per year for a comfortable retirement.

Outlines

00:00

💡 Importance of Financial Literacy and Self-Education

This paragraph introduces financial literacy as a crucial skill in today's world. Despite its growing presence in schools, many adults lack formal education on the subject. Fortunately, the rise of blogs, podcasts, and other educational platforms offers accessible ways to learn about finance. Financial literacy empowers individuals to make informed decisions regarding their financial goals. The narrator highlights the importance of self-education and how it can positively impact one's financial future, presenting opportunities for savings, investments, and new passions.

05:05

👨‍👩‍👧‍👦 Case Study of Two Couples: Same Start, Different Choices

The second paragraph sets up a comparative case study between two couples. Both couples, fresh out of high school, will be working and earning the same amount ($12/hr) during their summers and school years. After graduation, they will earn a combined household income of $60,000 annually. However, differences in financial decisions will affect their long-term wealth. The first couple, Bill and Mary, will buy new cars, while the second couple, John and Jane, opts for used ones. Bill and Mary receive a down payment gift for their home, while John and Jane save for theirs. The differences in savings, investments, and financial choices will play a pivotal role in shaping their financial futures.

10:07

📚 Financial Decisions of Bill and Mary

Bill and Mary’s financial journey is explored in this paragraph. They both work part-time during college and full-time in summers, making $10,000 in summer and $31,200 annually during school. Attending an in-state university, they spend about $25,000 annually, accumulating over $100,000 in student loan debt by graduation. Post-college, they face typical American expenses: housing, transportation, healthcare, food, and more, with insurance being a significant cost due to whole life policies and car ownership. With heavy debt, no savings or investments, and cutting out entertainment, they struggle financially until age 33 when their loans are paid off. By age 53, they pay off their mortgage, significantly reducing expenses. After 40 years, their net worth (excluding home value) is $75,000, with their home valued at $820,000.

15:09

📈 How Financial Literacy Transformed John and Jane’s Future

In contrast to Bill and Mary, John and Jane make more strategic financial decisions. They opt for community college for the first two years, significantly reducing their student loan debt to $20,000. They also develop a side hustle that nets them $12,000 annually, boosting their household income. Post-graduation, they save by renting with roommates, buying one used car, and cutting down on dining out, thus saving an additional $15,000 annually compared to Bill and Mary. With the extra savings, John and Jane invest aggressively, taking advantage of compounding interest. They delay buying a home until age 27 and rent out rooms to further reduce housing costs. These decisions set them up for much greater financial success.

🏠 John and Jane's Path to Financial Independence

This final paragraph delves deeper into John and Jane’s financial decisions. They purchase a home at age 27, benefiting from rental income. Their more frugal lifestyle allows them to allocate money toward entertainment, charitable donations, and a college fund for their child, ensuring that their child will graduate with minimal debt. By age 43, John and Jane have paid off their home, and by the time they reach 40 years post-graduation, their investments have grown to $4.5 million, with their home valued at $728,000. Their total net worth surpasses $5.2 million, allowing for a comfortable retirement. The paragraph emphasizes the importance of financial literacy and how even small adjustments can lead to massive financial success, far beyond what Bill and Mary achieved.

Keywords

💡Financial Literacy

Financial literacy refers to the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. In the video, it’s defined as the knowledge that allows individuals to make informed and effective decisions with their financial resources. The video emphasizes that financial literacy is crucial for achieving personal financial goals and adapting to life’s financial challenges.

💡Traditional Education

Traditional education refers to the standard system of schooling, typically covering general subjects but often lacking in areas like personal finance. The video highlights that financial literacy is not thoroughly taught in schools, which leaves many adults underprepared for managing money. Alternative resources like blogs, podcasts, and YouTube are suggested as ways to bridge this educational gap.

💡Budgeting

Budgeting is the process of creating a plan to spend your money. It is essential for managing personal finances effectively. The video uses examples of typical American household expenses—such as housing, transportation, and food—to show how financial literacy can help individuals create realistic budgets, avoid debt, and make more informed financial decisions.

💡Student Loans

Student loans are borrowed money used to pay for higher education, which must be repaid with interest. In the video, Bill and Mary accumulate over $100,000 in student debt, highlighting the significant financial burden that can result from lack of planning and awareness. In contrast, John and Jane manage their educational costs better by attending a community college first, emphasizing the importance of financial literacy in making smarter educational and financial choices.

💡Compounding Interest

Compounding interest is the process of earning interest on both the initial principal and the interest that has already been added to it. The video demonstrates how John and Jane take advantage of compounding interest by investing early, which allows their money to grow substantially over time. It contrasts their financial success with Bill and Mary’s slower progress due to a lack of early investments.

💡Side Hustle

A side hustle is a part-time job or business in addition to a full-time job that provides extra income. John and Jane start a side hustle by flipping items for profit, which helps them pay off their debts and save for future investments. This demonstrates how financial literacy encourages creative income strategies that contribute to financial stability and growth.

💡Housing Costs

Housing costs refer to the expenses related to maintaining a place of residence, including rent, mortgage, utilities, and property taxes. In the video, the average American spends around $20,000 annually on housing. John and Jane save money by renting with roommates initially, while Bill and Mary’s lack of financial literacy leads them to higher housing costs earlier in life.

💡Investing

Investing is the act of allocating money with the expectation of generating profit or income. The video emphasizes how John and Jane prioritize investments, leading to substantial wealth growth over time. In contrast, Bill and Mary miss out on early investment opportunities due to financial mismanagement, showing the importance of understanding investment strategies as part of financial literacy.

💡Emergency Savings

Emergency savings refer to money set aside for unexpected expenses or financial hardships. While the video doesn’t delve deeply into the specifics of emergency savings, it highlights the importance of saving in general, such as for car purchases or down payments. John and Jane’s ability to save effectively is a result of their financial literacy, giving them a safety net and allowing them to avoid taking on unnecessary debt.

💡Debt Repayment

Debt repayment is the process of paying back borrowed money, including loans or credit card balances. The video shows how Bill and Mary struggle with large student loan payments, while John and Jane, through financial literacy, graduate with much less debt and are able to pay it off quickly. This illustrates how understanding debt management is crucial for long-term financial success.

Highlights

Financial literacy is essential in today's world, but it's not always taught in schools.

People can learn finance through various outlets like blogs, podcasts, and YouTube channels.

Financial literacy helps individuals make informed and effective decisions with their resources.

Exposure to different perspectives on finance can introduce new ideas for saving, making money, and discovering passions.

Resources like books and videos can provide reassurance during uncertain times and help people stay motivated toward their goals.

The average American household spends nearly $20,000 annually on housing costs, including mortgage/rent, utilities, and taxes.

Transportation is the second-largest expense for Americans, costing an average of $9,000 per year.

Food expenses, including dining out, cost Americans around $7,150 annually.

Healthcare costs are another major expense, with the average American household spending $4,600 per year.

Two couples are compared, one following average financial habits (Bill and Mary) and the other making financially informed decisions (John and Jane).

John and Jane reduce their college costs by attending community college for two years, saving them $80,000 compared to Bill and Mary.

John and Jane create a side hustle that earns them an additional $12,000 a year.

By delaying buying a house and opting for one used car instead of two, John and Jane save $15,000 annually compared to Bill and Mary.

John and Jane end up with over $5 million in net worth by making strategic financial decisions, five times more than Bill and Mary’s $895,000.

John and Jane's financial literacy allows them to achieve financial freedom, with their investments generating $180,000 in annual income for retirement.

Transcripts

Financial literacy is one of the most important skills to learn in today's world.

However, it's not one that's always thoroughly talked about in schools, though we are slowly

but surely improving on that front as time goes on.

However that's not going to be of much help to those of us who have already left school.

Thankfully the proliferation of blogs, podcasts, YouTube channels, and other outlets have given

people easy ways to learn more about finance outside of the traditional education system.

Today I'm going to show you why that is so important.

Let's talk about just how big a difference becoming financially literate can be for your

life.

So what is financial literacy?

The dictionary definition would define financial literacy as the possession of the set of skills

and knowledge that allows an individual to make informed and effective decisions with

all of their financial resources.

In more plain English, it is the ability to figure out what financial decisions are likely

to lead you to achieving your financial goals and having the ability to act on that knowledge.

So how do we become financially literate?

Assuming that you did not get enough financial education in school you will need to take

things into your own hands.

You do this by exposing yourself to new ideas from as many different people and perspectives

as you possibly can.

Read books, take classes, watch videos or look at blogs related to money just like you

are now.

Any of these can have very positive effects on your financial situation both in the present

and future.

They can introduce you to new ideas that you may not have come across on your own.

These may lead to you saving or making more money or even finding new passions.

These outlets can reassure you during uncertain times that the world isn't coming to an end

and this too shall pass.

This can be particularly helpful during less than ideal times.

They can give you encouragement when things are going well and help keep you motivated

to continue working towards your goals.

And perhaps most importantly (especially if you're just starting out and didn't get much

financial education when you were growing up) they can introduce you to so many new

possibilities that get you excited about researching finance.

That'll get you thinking about what you can accomplish in your own life with your own

resources.

Before we get into an example showing how big of a difference even a moderate level

of financial literacy can make let’s discuss some statistics relating to the average American

budget.

Some light rounding has been done, but this should give us a general idea of what the

typical American spends money on.

According to data gathered by the Bureau of Labor Statistics’ Consumer Expenditure surveys,

the average American household spends almost $20,000 a year on housing costs.

These costs include mortgage or rent payments, utilities, maintenance and repairs, property

taxes, and other related fees.

The median price of a home is approximately $300,000.

The average rent for a 1 bedroom apartment nationwide is $950.

2-bedroom apartments will run close to $1,200 a month.

Transportation is the next largest category and it costs the average American about $9,000

annually.

These costs include fuel, maintenance, repairs, public transit, plane tickets, and other related

transportation expenses.

Food costs about $4,000 and dining out costs about $3,150.

Healthcare costs about $4,600 a year.

That includes health insurance as well as prescription medication, doctors visits, and

other health-related expenses.

We spend around $2,500 a year on personal care and clothing.

The clothing portion of that cost also includes related services such as tailoring and dry

cleaning.

We also spend almost $3,000 a year on various forms of entertainment like cable, concerts,

movies, and subscription services.

Insurance costs can vary widely depending on your level of coverage and what type of

insurance you’re looking for, but here are some rough averages.

Renter’s insurance will run you about $180-$200 a year.

Homeowners insurance averages between $1,000-$1,100 a year.

Term life insurance averages around $2,000 a year and whole life policies can be upwards

of $5,000 annually.

However, like I said those can vary quite a bit depending on what you’re going for.

Finally, giving and miscellaneous expenses amount to around $2,000 and $1,000 a year

respectively.

The reason I bring these statistics up is its what we’re going to be basing most of

the expenses of our first couple on.

In this example, we’re going to be looking at two couples who have just graduated high

school and are looking to start college at the end of the summer.

They will both start with no debt to speak of and will be able to work all summer before

starting college.

They will both earn the same amount of money from their jobs before, during and after school.

In both cases, they will be earning $12/hr from their summer and school jobs and will

have $60,000 a year in household income from salary after graduation.

As for other expenses, they will each be getting new cars once every 7 years.

Our first couple will be buying new cars while our second couple will get their cars used.

Both couples will be getting homes, but our first couple will be lucky enough to receive

a full down payment as a gift from their parents while our second couple will have to save

for the down payment themselves.

Where saving money is concerned both couples will try to have enough money on hand to purchase

their next cars outright.

However, as you’ll see this won’t be possible all the time.

The down payment money will also go into savings for our second couple.

The money that is put into savings will earn 2.5% in interest.

The rest of the money that doesn’t need to be spent or saved will be invested.

Money invested will be earning 8% in interest.

There will also be a dollar-for-dollar match for the first $1,800 invested each year.

This equates to roughly 3% of our couples salaries.

The net worth of each couple will be determined by how much they have saved and invested.

It will not include the value of their home, but I will mention those at the end separately.

With that out of the way, let’s get into the example and see just how big of a difference

financial literacy can make on our lives.

Bill and Mary have just graduated from high school and are looking to go to college.

As I mentioned, they will work the summer after graduating from high school and during

college for $12/hr.

During summers they work full time and during the school year, they work 20-hours per week.

Therefore Bill and Mary make about $10,000 the summer before college and $31,200 a year

combined while going to school.

Once Bill and Mary graduate they will get new jobs that each pays $30,000 a year for

a total household income of $60,000 annually.

Bill and Mary attend 4-year universities in state which cost them about $25,000 per year

to attend.

These numbers are based on averages gathered by valuepenguin.com.

The $25,000 per year includes all tuition, fees, books, and other expenses relating to

their education.

Between food, transportation, and the occasional fun night out Bill and Mary spend an additional

$850 a month.

Therefore in total, they spend just over $60,000 a year while in school.

Four years go by and unfortunately for Bill and Mary they racked up a lot of student debt.

All told, they will graduate with over $100,000 in student loans.

Assuming 4.5% interest their student loan payments will be over $1,000 a month!

After graduating from college, Bill and Mary’s budget looks similar to the average American

budget in most respects.

They spend around $20,000 in housing costs, $9,000 on transportation, $4,600 on healthcare,

$2,500 for clothing and personal care, a little over $7,000 for food and dining out, and about

$1,000 for miscellaneous expenses.

In total, they spend everything they make.

However, there are still a few things worth noting.

First is their insurance bill.

They will spend about $6,000 a year for all their insurance.

This is because they have a whole life insurance policy (which is generally more expensive

dollar for dollar than term life), pay homeowners insurance (which is generally more expensive

than renter’s insurance since there’s more to cover), and have two cars to insure.

Another thing to notice is that they aren’t doing any charitable giving, saving, or investing

because they can’t afford to with their other expenses.

Lastly, their entertainment budget is essentially zero.

They had to cut that in order to make their debt payments each month.

Unless they were to find some other source of income or slash their current expenses

somehow, this is likely to be how they live for the next several years.

At the age of 33 Bill and Mary’s student loans are finally paid off.

As a result, their expenses drop to about $50,500 a year.

This also means that they can finally increase their entertainment budget.

I’m going to assume that from this point forward they spend right about the average

of $3,000 a year on entertainment.

20 years later at the age of 53, their home is paid off which drops their housing cost

significantly.

Based on their $240,000 mortgage and assuming a 3.85% interest rate (which is right about

average as of the time of this writing) for a 30-year loan, Bill and Mary's annual expenses

will fall to about $39,750 a year.

40 years after graduating high school Bill & Mary will have a paid-for home.

They will no longer be financing their cars and will have a net worth of $75,000.

Additionally, they bought their home for $300,000 with the help of their parents 34 years ago.

They haven’t moved since, which is pretty unusual but it certainly has helped them financially.

Assuming the value of their home grew by 3% per year their home would be worth $820,000

today.

So between their savings, investments, and home, they are worth a whopping $895,000!

That’s pretty good considering they carried so much debt that they couldn’t save for

the first several years of their careers.

But how much better could they have done if they played their cards a little differently?

Let's find out by comparing them to John and Jane.

John and Jane may not have all the answers but they have researched personal finance

and investing.

They have learned enough to make some different choices than Bill & Mary did.

The first difference comes in the form of where they go to school.

Bill and Mary graduated high school and went straight to a 4-year University.

John and Jane decide to get their first two-years done at a local community college.

As it turns out this is a lot cheaper.

According to data from valuepenguin, the average cost of a community college is $4,800 per

year.

Therefore, John and Jane will be spending $9,600 per year between the two for their

first two years of college.

They will then transfer to a 4-year university to complete their bachelor’s degree just

like Bill and Mary.

This will cost them the same $25,000 per year, per person like it did for Bill and Mary.

In total, their college education will set them back almost $120,000.

That’s certainly a lot, but it’s far more manageable than the $200,000 than Bill and

Mary spent on their education.

Assuming their non-education expenses and incomes were the same as Bill and Mary, John

and Jane would graduate with about $20,000 in student loans.

However, this is where we see the second difference between the path Bill & Mary took and the

one John and Jane are taking.

John and Jane noticed that their salaries weren’t going to be able to pay for their

college in full so they decided to start researching how to make money outside of a job.

They learned about side hustles and eventually started one where they flip items on places

like the Facebook marketplace for a profit.

They net about $12,000 from this side hustle and since it doesn’t take much time they

will continue doing it after graduation.

John and Jane graduate and get jobs that pay them a combined $60,000 a year.

With their side hustle, this makes their household income $72,000 annually.

However, the differences between John and Jane’s working life and that of Bill and

Mary’s doesn’t stop there.

John and Jane want to supercharge their finances while they’re young and able to get the

most out of compounding interest.

There’s also something to be said about spending more of their money on things that

they care about most.

As a result, they decide to save on big-ticket items like housing and transportation.

John and Jane don’t buy a house right after graduating from college.

They make good money but haven’t had a chance to finish paying off their student loans or

save up a good down payment yet.

However, they still want to keep their housing costs down, so they find some roommates to

get an apartment with.

As I said earlier, the average rent for a 2-bedroom apartment nationwide is a little

under $1,200 a month.

If we assume John and Jane split the costs evenly with their roommates and also assume

that utilities and other apartment related expenses adds another $400 a month onto the

total housing costs then John and Jane’s portion of the costs will be $800 a month.

$800 a month for housing costs is $9,600 a year which is about $10,000 less than the

typical American pays for shelter.

To save money on transportation, John and Jane buy one used car for the two of them

and they buy it with cash.

This will mean that they have to look for carpooling options to work, either with coworkers

or by taking turns dropping each other off, but for now, that’s okay with them.

The next time they're shopping for cars they can get one for each of them.

This strategy actually accomplishes a couple things.

First, they only have one car to repair and maintain.

And second, they only have one car to pay insurance on.

Statistically speaking, the average American household has about 2.6 cars.

So I don’t think it’s beyond belief that John and Jane could cut their transportation

costs in half with this strategy.

With the insurance and transportation savings, this strategy keeps approximately $5,000 a

year more in John and Jane pocket when compared to Bill and Mary.

The last strategy John and Jane use to save money is to limit the amount of times that

they eat out.

As I said, the average American spends over $3,000 a year eating out and $4,000 on groceries.

By limiting their dining out expenses John and Jane’s total food costs come out to

about $5,000 a year.

While most of the money John and Jane saved with these strategies go toward their investments,

some will go to savings and other things.

John and Jane will need to save $20,000 every 7 years to pay for their new cars and will

need $60,000 for a down payment on their future $300,000 home.

The home will be on a 15-year mortgage with an interest rate of 3.3% (once again the rough

average for 15-year mortgages as of this writing).

The monthly payment will be just shy of $1,700.

We had Bill and Mary get their home right out of college at the age of 23.

I will have John and Jane get their house at the age of 27 since that’s when they

would’ve saved up enough to make the down payment.

They will also rent out their unused rooms to help offset the cost of housing.

Their rental income is assumed to be $500 a month.

John and Jane will be spending $1,700 a year on entertainment (which is the average amount

spent on entertainment minus the expense of cable).

They will be giving $2,000 to causes they believe in.

And they will also be investing $2,000 a year toward their kids' future college fund starting

when he or she is born and continuing until he or she turns 18.

The investments will be in an ESA for their son or daughter can withdraw the money for

college tax-free.

I’m going to assume that their child is born the year they move into their new home.

Everything else will be kept the same as it was in Bill & Mary’s example.

Based on this scenario John and Jane would have their home paid off when by the time

they’ve turned 43.

This will lower their annual expenses by about $20,400 a year.

Two years later their son or daughter will graduate high school with over $80,000 sitting

in his or her college fund.

This means that John and Jane no longer need to save money into the ESA which’ll lower

their annual expenses by an additional $2,000.

And 40 years after John and Jane graduated high school they have a paid-off home, a kid

who has graduated college mostly, if not entirely, debt-free, and a whopping $4,500,000 to their

name.

Their house was originally valued at $300,000 when they bought it 30 years ago.

Assuming the value of their home grew by 3% per year their home would be worth $728,000

today.

So between their savings, investments, and home, they are worth a whopping $5,228,000!

That’s over five times the net worth Bill and Mary ended up with.

And John and Jane have set themselves up for a sweet retirement.

Based on the 4% rule their $4.5 million dollars would give them a $180,000 a year income for

the rest of their life!

That’s how important becoming financially literate is.

And that’s why I and so many others like me online try to teach it.

We’re very fortunate here in America that we can live a pretty comfortable life even

if our decisions weren’t ideal or if we got a late start like Bill and Mary did with

their savings.

But we also have an amazing opportunity to set ourselves up for an extraordinary life

both now and in the future if we take the time to learn about how money works and how

we want to work with money.