Financial Literacy Step Two: The Plan

Once you have had time to think about your dreams, the next step in the process is developing a plan on how you are going to achieve your dreams. Your plan will consist of many steps but essentially it will involve setting up both your household finances and your investing habits to move you along your path to success.

The household finance step or better known as budgeting, is the first discipline that your plan should focus on. You will need to take a month to analyze where your money is coming from and where it is going. After this analyse, you are able to stream line your budget so that it is the most tax efficient while moving you towards achieving your dreams. Most financial experts agree that "Paying Yourself First" rule should always be in effect. Take a portion of the household money coming in and turn around and invest it by paying yourself before you pay anyone else. This will obviously need to be an amount that fits your budget but must be a consistent habit that occurs everytime you are paid.

The site http://www.bankrate.com/finance/financial-literacy/secrets-to-creating-a-budget-1.aspx clearly outlines the seven steps to creating a budget which I have posted below:

Indeed, budgets play a pivotal role in helping consumers pay off debt, feather their nest egg and make the most of their hard-earned dollars.
Yet, despite their best intentions, many Americans lack the money-management skills necessary to get their bank accounts under control. Why? Often, it's because they don't know where they stand, says Jim Tehan , a spokesman for Myvesta Foundation, a self-help consumer education Web site.

"People write out budgets all the time without knowing where their money is really going," he says. "What they've created is a wish list of how they'd like to spend their money, but it's not realistic. It's a page of lies."

Follow the money: Track your spending
The first step to developing a budget, says Tehan, is to track your expenses for at least a month, using a checkbook ledger, a sticky note inside your wallet or a Bankrate daily expense work sheet. Be sure to record every purchase no matter how small, including ATM fees.
"Once you know where your money is going, you can make an educated decision about how best to allocate your money," he says.

Many novice budgeters make the mistake of becoming too financially conservative, at least on paper.

"The No. 1 rule of setting budgets is to not cut all the fun out of your life. Inevitably, Spartan budgets that have no allowance for entertainment are doomed to fail."

Instead, learn to moderate. "If you're eating out every night, and that's something you enjoy doing, try eating out once a week instead," says Tehan. "It's not about cutting out everything that gives you joy in life. It's about better allocating your money."

Make savings contributions automatically
Though every budget scenario is different, Curt Weil, a Certified Financial Planner for the Lasecke Weil Wealth Advisory Group in Palo Alto, Calif., says a good rule of thumb is to allocate at least 10 percent of your earnings toward savings, using direct deposit to pay yourself first.
Tehan agrees. "If you put that money aside before you even see it, you won't miss it. Direct deposit helps to put your savings on autopilot."

Short-term savings that you may need to access can be held in an interest-bearing savings account, six-month certificate of deposit or money market fund. Long-term savings, meanwhile, should be directed toward a tax-friendly retirement savings tool, such as an individual retirement account, or IRA, or 401(k).

The ultimate goal, of course, is to maximize your RRSP , the maximum is $18,500 for 2010. But those just starting out should contribute at least enough to get the employer match, says Weil.

Define spending and priorities
Another 35 percent of your earnings, he says, should be earmarked for housing and utilities. Weil says, however, that homeowners can often up that percentage since principal payments are already a form of forced savings, and the mortgage interest they pay is tax-deductible.
If you're saving for something specific, such as a new car or your child's college education, you may want to set aside another 10 percent of your earnings into an interest-bearing account or a tax-favored 529 college savings plan.

Everything else-- the remaining 45 percent-- is discretionary, for use on food, entertainment, clothing and vacations.

That's where priorities come in. You can't have everything you want, says Martin Siesta, a Certified Financial Planner for Compass Wealth Management in Maplewood, N.J., but you can direct your dollars toward things you want the most.

"If consumers start by deciding what's most important to them, then cutting back on some of the things that aren't that important isn't really a sacrifice," he says.

Pay with cash
One you've determined how much to set aside for saving, spending and investing; it's time to make those numbers stick. The growing popularity of credit and debit cards makes it all too easy to overspend.
With the exception of your mortgage and car loan, most consumers should implement a strict policy of paying with cash for groceries, clothes, vacations and nonessential items.

advertisementSiesta also recommends relying less on ATMs, especially those that charge a fee. Withdrawing a fixed amount of discretionary money at the beginning of the month, he says, forces you to make better spending choices.

"By spending cash out of an envelope you begin to get a better feeling for where your money is going and what your priorities really are."

Strategically pay down expensive debt
Financially speaking, of course, you'll never get ahead if you don't also implement a plan to pay down your debt. Interest payments made to credit cards not only cost you big, but also deny you the ability to apply that money toward savings or entertainment.
"I approach it from an investment point of view," says Weil. "Not having to pay interest is the same, economically, as earning interest. So not having to pay credit card interest is like earning 18 percent."

According to Myvesta Foundation, the average American carries $2,328 in credit card debt, spread out over 2.9 cards.

Conventional wisdom maintains that consumers with multiple credit card balances should tackle the card with the highest interest rate first, while continuing to make minimum payments on their other cards. Once the first card is paid off, focus on the next highest rate card.

Tehan contends, however, some debt-laden consumers get a psychological boost by paying off the smaller balances first. "Paying off your highest rate card first makes sense because it saves you the most money, but if you have several smaller cards it can be easier psychologically to get those out of the way first. That way you can see some immediate progress, which gives you a little boost," says Tehan.

The secret to paying off debt is to determine how much you can afford to send each month and make those payments consistently.

"It's important to keep sending the maximum amount you can afford to send," says Tehan. "Some people make the mistake of reducing the amount they send when they see their payments going down."

Build a safety net
No matter what your debt situation, you should also begin saving for a rainy day.
Financial planners recommend setting aside three- to six-months' worth of living expenses into an emergency fund, in case you or your spouse lose a job, fall ill or get hit with an unexpected bill.

"It's important to set aside savings while you're paying off debt," says Tehan. "It may sound backward, but if you don't have an emergency account and you pay down your credit cards for six months and then an emergency pops up, all the progress you have made is going to be instantly wiped out."

The most painless way to save, of course, is to set aside any financial windfalls you receive, such as bonuses, tax refunds or yearly raises. You could also try saving your change or any $1 bills that find their way into your wallet.

Live within your means
Learning to live within your means is a simple matter of spending less than you make. For most consumers, that means cutting back. It does not mean doing without.
According to Siesta, there are dozens of ways to reduce your monthly expenses without crimping your lifestyle.

And above all else, stop trying to keep up with the Joneses. Your neighbors with the latest clothes and luxury cars may be drowning in debt, and while you may not sport a designer watch, you will be able to sleep at night.

"Being in control of your finances not only saves you money, but it also makes you a more financially secure person and family," says Tehan.

Financial Literacy Step One: Having a Dream

The famous quote by Martin Luther King, "I have a dream.." should be the first part of everyone's financial plan. King's dream was the vision that provided him guidance and reassurance when things were not going well. The markets will have ups and downs as will your life, so having a dream will keep you on your path towards where you want to be.

The dream also acts as your rationale for all of the other steps in your financial literacy plan. Some of the steps will not be easy to do and will test your will power. Having a strong rationale will prevent you from swaying off course. Your dreams should be clear and specific. They need to be shared with your family and friends and then this way they can support you as you move along your path.

Possible dreams could be to retire by the age of 55 so that you are young enough to truly enjoy retirement. Others may include: developing passive income streams to pay you while you sleep, travel to exotic places in the world, build a cottage on the lake or start a dream business. Achieving your dreams will essentially be the essence or the true test on whether you have developed your financial literacy to the fullest.

Financial Literacy Series

As many of you have known, developing my own financial literacy has been one of my passions over the last few years. I am now embarking on my own blogging mission to uncover as much information and share it with whoever will listen on this very important topic.

To begin, I thought a good starting point would be to look at the definition of financial literacy. According to http://www.financialliteracyincanada.com/eng/about-financial-literacy/definition.php; The Canadian Task force on Financial Literacy defines financial literacy as having the knowledge, skills and confidence to make responsible financial decisions.

•“ Knowledge ” means understanding personal and broader financial matters.
•“ Skills ” are the ability to apply that knowledge in everyday life.
•“ Confidence ” means feeling self-assured enough to make important decisions. This is often a key factor in galvanizing people into action.
•By “ responsible financial decisions ,” we mean that people will be able to use the knowledge, skills and confidence they have gained to make choices that are appropriate to their own circumstances.

Barely a day goes by that Canadians do not have to make a financial decision of some kind or other. Some decisions are routine, such as what groceries to buy or whether to pay by cash or by credit card. However, others are more momentous, such as deciding to open a savings account, or to go away to college or university or to take out a first mortgage.

To make decisions, people draw on their existing knowledge in a particular situation and apply it in such a way that is appropriate to their circumstances.

My goal over the next few months will be to assist people in the educational component of financial literacy. I believe this fits well with our mission as a club and will also assist me in developing a deeper understanding on all topics related to financial literacy. I will be using various sources to support the content but strongly encourage participation and comments on each blog post. Some of the topics that I will touch on include: Saving Money, Using Credit, Mortgages, Insurance, Investing and Estate Planning.