The Most Valuable Financial Asset You Will Ever Have | Importance of Financial Literacy/Intelligence
Summary
TLDRThis 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
- đĄ Financial literacy is crucial but not always covered in school, though it's improving over time.
- đ People can learn financial literacy through blogs, podcasts, YouTube, and other self-education outlets.
- đž Financial literacy means understanding and making effective decisions about your finances to achieve your goals.
- đ Self-education on finance through reading, classes, and videos can positively impact your financial future.
- đ The average American household spends large amounts annually on housing, transportation, food, and healthcare.
- đ Making conscious financial choices, such as buying used cars or attending community college, can lead to significant savings.
- đ° The power of financial literacy can compound over time, leading to better wealth accumulation through strategies like smart investments and budgeting.
- đĄ A real-life example showed that a financially literate couple (John and Jane) ended up with 5x more net worth than a couple who didnât practice financial literacy (Bill and Mary).
- đ By taking the time to learn about money and make informed decisions, people can set themselves up for financial success and a comfortable retirement.
- đŻ 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 donât 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 Janeâs 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 Janeâs 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 Janeâs 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
đĄ 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.
đšâđ©âđ§âđŠ 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.
đ Financial Decisions of Bill and Mary
Bill and Maryâs 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.
đ How Financial Literacy Transformed John and Janeâs 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.
đ John and Jane's Path to Financial Independence
This final paragraph delves deeper into John and Janeâs 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.
Mindmap
Keywords
đĄFinancial Literacy
đĄTraditional Education
đĄBudgeting
đĄStudent Loans
đĄCompounding Interest
đĄSide Hustle
đĄHousing Costs
đĄInvesting
đĄEmergency Savings
đĄDebt Repayment
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 Maryâs $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 letâs 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 Statisticsâ 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 youâre looking for, but here are some rough averages.
Renterâs 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 youâre 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 weâre going to be basing most of
the expenses of our first couple on.
In this example, weâre 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 youâll see this wonât 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 doesnât 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, letâs 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 Maryâs 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 renterâs insurance since thereâs more to cover), and have two cars to insure.
Another thing to notice is that they arenât doing any charitable giving, saving, or investing
because they canât 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 Maryâs 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.
Iâm 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 havenât 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!
Thatâs pretty good considering they carried so much debt that they couldnât 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 bachelorâs 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.
Thatâs certainly a lot, but itâs 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 werenât 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 doesnât 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 Janeâs working life and that of Bill and
Maryâs doesnât stop there.
John and Jane want to supercharge their finances while theyâre young and able to get the
most out of compounding interest.
Thereâs 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 donât buy a house right after graduating from college.
They make good money but havenât 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 Janeâs 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, thatâs 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 donât think itâs 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 Janeâs 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 thatâs when they
wouldâve 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.
Iâm 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 & Maryâs example.
Based on this scenario John and Jane would have their home paid off when by the time
theyâve 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 whichâll 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!
Thatâs 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!
Thatâs how important becoming financially literate is.
And thatâs why I and so many others like me online try to teach it.
Weâre very fortunate here in America that we can live a pretty comfortable life even
if our decisions werenât 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.
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