Most people think financial literacy means fixing spending habits like daily $4 lattes and investing the money in some little-known financial instrument your college roommate can’t shut up about on Facebook. It is so much more than that.
Financial literacy is something that is new for a lot of people. It usually takes a long time to acquire, but, the good news is that we can speed things up for you, saving hundreds of hours of frustration and confusion trying to shore up your personal finances.
You don’t have to spend years studying compound interest charts or weeks trying to find the latest hot stocks to get there. All that’s required of you is a willingness to think about money in a different way. This new-fangled thinking forms your financial literacy.
Here are Ramit’s five simple steps to help you become financially literate and create a personal money management system that practically runs on auto-pilot.
1. Automate your money
Let’s face it: making and saving money is hard work but understanding how to make and save money can be even harder.
It doesn’t have to be. As Ramit points out, when it comes to managing money, 80% (or more) of your long-term success comes down to your behavior around saving, spending, and investing,
The other 20% comes from knowing what to do.
So, why not spend 20% of your time on acquiring financial literacy, and put systems in place to reduce the 80% of the time needed on those good behaviors to save, spend, and invest.
The good news is that 80% of your time spent on such good behaviors can get drastically reduced by automating your bill paying and saving. Whether from the websites of the bill payees themselves, or directly from your online checking account, set up recurring payments and transfers so that you’ll never have to think twice about where your money is going.
You won’t miss the money because all (or most) of your money will go where it’s supposed to go — automatically.
Here are Ramit’s spending recommendations:
- Fixed costs – paying bills, such as rent, utilities, or debt
- Investments – placing funds in retirement accounts, such as a Roth IRA or 401(k)
- Savings – putting money away in an emergency fund, savings accounts, gifts, vacations, or for down payments on large purchases
- Guilt-free spending money – spending on restaurants, clothes, or entertainment
2. Discover hidden income
Do you pay for car insurance or for cell phone service? Is it the same amount each month? Surprise! It doesn’t have to be. Bills that seem fixed actually aren’t.
In fact, you’re most likely paying much more than you should.
Wouldn’t it be great to spend less on the things we don’t even like paying for? Think about banking and credit card fees, car insurance, student loans, even your cell phone bill—accounts with interest rates or terms that we seemingly don’t have control over.
However, the truth is that you do have control, and Ramit can show you how a few one-time, 5-minute phone calls can save you thousands every month. It’s all about negotiation: doing your homework, speaking to the right person, and explaining why a change (in your favor) is needed. Gentle nudges and requests to speak to supervisors also help.
Logically, by spending less on the things you’re already paying for, you can have more money left over to save, plan for retirement, or make major financial decisions.
These savings can be considered hidden income, which you can use as cash for large expenses (#3 of Ramit’s Money Rules), money on books, appetizers, health, or donating to a friend’s charity fundraiser (#4 on the list), or spending on health or education (#7 on the list).
Discovering this hidden income via a few phone calls that lead to automatically reduced monthly bills is so much better than deciding against that $4 latte. Ramit points out that deciding against the latte on a daily basis is painful and sets us up for failure. However, changes that only require us to set it and forget it — via just a few phone calls per year — allows us to focus on things that truly matter.
3. Start to invest — now!
“I don’t have time” and “I don’t want to lose money” are common excuses of why people don’t invest.
As Ramit points out: Nobody just LOVES spending time managing their money and, certainly, nobody likes losing it (time or money).
However, Ramit has done the heavy lifting by researching investment strategies that don’t take lots of time to maintain and can still pay off in a major way.
You don’t have to be a super-smart, stock-picking wizard to make money.
Here are Ramit’s three most important factors for investing:
- Do your research.
- Be disciplined.
- Start early.
It takes work and consistent savings to become rich, so it’s easier for a lot of people to keep procrastinating. Every extra year you wait to start investing makes it harder to make the same amount of money. We can’t imagine you started investing when you were a high school or college student, but investing, if you haven’t started already, needs to begin and become part of a long-term strategy.
Start early and you will be rich. Boom — drop the mic.
But what if you think you’re too late? It’s never too late, but for those who think they are late to the game — starting to invest, say, in their 50s or even 60s — consider target-date funds and automated funds withdrawal to an IRA. Investing something is better than nothing. A recent Federal Reserve report, cited by Statista, found that nearly a quarter of U.S. adults have absolutely no retirement savings or pension at all — you do not want to be in this statistic.
4. Eliminate your debt
Debt sucks. Credit card debt is one of the biggest barriers to living your Rich Life.
Debt prevents us from enjoying ourselves and investing in ourselves. If your net worth is in the red, it makes it hard to even conceive of creating a financial plan, investing, or making a large purchase.
Worst of all, debt buries us in guilt and fear.
The good news is that Ramit has 5 steps to getting out of debt fast:
- Figure out exactly how much debt you have.
- Decide which debt you will pay off first
- Increase your credit score and lower your APR (and your monthly payments).
- Choose the source of funds to use to pay off the debt
- Get started!
You will be on your path to zero debt in no time.
Understanding how credit card debt, credit history, credit reports, and credit scores work — and their relationship to your overall financial health — is an important part of your financial literacy. Don’t ignore it.
5. Earn more
Although Ramit stresses that financial literacy is about making money work for you, make no mistake: you still need to work for your money.
Indeed, earning money — and more of it — is the fastest and biggest way to improve your financial power.
Luckily, there isn’t a single, universal sure-fire way to earn more money. Some people want to get a raise; others want to make extra money with a side hustle or by earning passive income. Still, others want to start a new business that will replace their full-time job or main source of income.
What’s more, you can use the skills and experience you already have to make more money and put it into your accounts.
Steady streams of income, monthly or regularly, can certainly build up over the long term. For example, $300 extra per month becomes $3,600 per year, which over 5 years becomes $18,000 or more if the money is placed in an interest-bearing savings account or investment account.
Final words
Look, we get it: The amount of information on the internet presuming to teach financial literacy or receive a financial education can seem insurmountable.
The good news is that you don’t have to spend years studying compound interest charts or weeks trying to find the latest hot stocks to get there. All that’s required is a growth mindset: a willingness to think about making, spending, and saving money in a different way than you have in the past.
Read Ramit’s Money Management Made Simple today for your financial literacy.
