April is Financial Literacy Month, which is a month dedicated to something near and dear to the hearts of the staff at Compass Wealth Management: helping individuals become more knowledgeable and financially literate about their personal or small business finances.
The good news is that financial literacy is something that can be learned. Once acquired, it’s a skill that provides not just better money and debt management, but also improved peace of mind and decreased stress that can result when monthly bills overwhelm monthly income.
There are four basic components of financial literacy that are true for both individuals and businesses: budgeting, investing, borrowing, and taxation. Within each of these components, however, there are additional pieces that you must understand to truly build financial literacy.
For individuals, financial literacy starts with getting a handle on where your income goes each month. By making a budget, you can see how much you need to live and what you may be able to do without. That doesn’t mean that you need to eliminate all the “fun” items from your life. But when you make a list of your debts and assets, and assess your income, you may be able to see places where you can eliminate costs and save some money.
Reducing debt is also a key to helping individuals become more financially literate. According to recent surveys, the average American has more than $5,000 in credit card debt. There are two strategies for reducing credit card or other debt.
- Prioritize paying off cards with the smallest sums first and then apply this to the next smallest balance, repeating the process until all debt is paid.
- Prioritize paying off the debts with the highest interest rates. This has the potential to save you more money in the long run.
Remember, whichever approach you choose, you need to continue to make the minimum payment due on all your debts to keep from defaulting on any of them. For debt reduction, the important approach is persistence. Choose an approach and stay with it.
Everyone should have an emergency fund. You hope you will never need it, but putting money aside for an unexpected emergency might help reduce some anxiety if something bad occurs.
For small business owners, financial literacy begins with education. Most small business owners are experts at their core business, but less knowledgeable about business finances, and it may be impractical to know everything about both. There are resources available in the form of small business seminars, online financial tools, and through the local chamber of commerce or business school. It also may make sense to hire an accountant or a financial advisor.
Budgeting is also important for a small business. You need to know how much money is going through your business each month. Plus, a budget can help you track expenses and see how you might be able to cut costs and save money.
Finally, small business owners, particularly sole proprietors, should separate personal and professional income and expenses. It makes keeping the books easier and can help you avoid tax issues.
These are only a few of the steps that individuals and business owners need to be aware of when it comes to financial literacy. Everyone’s situation is different and Compass Wealth Management can help you navigate your personal or business finances.