Good morning! Today I have teamed up with a few other blogs around Shannon from The Heavy Purse to help promote Financial Literacy Month. What is financial literacy? According to Wikipedia,
financial literacy is the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.
So basically, it is about knowing about money. I am not an expert, but early on, I discovered something very important: to spend money, you need to make money. Duh, right? And to make money? Goodness gracious, you need to work!!
If you have been reading this blog for a while, you will know that I am a confessed procrastinator, borderline lazy. While I am ok to work for my money, I would hate to have to work any more than required to obtain the same thing for a bigger amount of money.
Here is an easy example. Imagine you make $10 per hour, and you want something that costs $100. Ignoring taxes and stuff, you would need to work 10 hours to get that thing. With a little research and an internet coupon, you could even get a discount and get that very same thing for $90, which means you would only have to work for 9 hours to get it.
That is how I approach finances. Trying to pay the minimum amount of money for a product that fits my requirement. This will not generally be the cheapest item around. I like a sturdy, reliable product that will last some time and for this, I am willing to pay a premium. Why? Put simply, it goes like this: if you buy a $100 cast iron skillet with a lifetime guarantee, you will use that skillet for the rest of your life. $100 upfront will get you 50 years of use, and end up costing $2 per year. If you buy a cheap $25 skillet but have to replace it every three years, after 12 years, you will have spent the same $100, or over $8 per year, and still need to replace the skillet once more!
So back to the $100 item you want. If you put it on credit, and only make minimum payments on your card, you will pay it off over several months, or even years. Quite convenient, I admit. But it will cost you much more! With the interests on cards sitting in the high teens, the $100 item will end up costing you $125 or more, meaning you will have to work for 12 1/2 hours instead of 10 to get the very same benefit out of the very same product. Who would want that?
This is why I care about financial literacy. Because you should never have to make any more effort than needed to get an item you need. The extra 2 1/2 hours you spent paying for that item are completely lost. You got nothing in exchange. You just went to work to pay off the interests.
An interesting exercise to help you put things into perspective is calculating your real hourly wage. You make $10/hour, 8 hours a day, but spend 1 hour commuting, 1 hour blowing off work related steam, that is a real 10 hours spent to make $80, bringing your hourly wage to $8 per hour. Your lunch hour is probably lost too, there is the cost of commute, taxes, car depreciation, daycare, work lunches, buying clothes for work or chipping in for your coworker’s 5k charity run.. all this may bring your real hourly wage even lower.
You are no longer working 10 hours for a $100 product, but 15 hours if your real wage comes down to $6.5/hour.
If you are aware of that, you can make an informed decision when deciding to buy something, forego the purchase or skip it altogether. Knowing about where money comes from and where it goes each month is the first step. Making deliberate choices to maximize your fun money and fund your long term goals is the next one. And before you know it, you will have more freedom, more time, and more money.
Why do you care about financial literacy?
This post was featured in Money Bulldog, thank you!