In this episode I welcome a Certified Professional Account, Melissa Houston, who has also spent time as a contributor to many magazines that I am sure some of us are familiar with, including Forbes and Yahoo! Finance.
Our discussion covers, in a boarder form, financial literacy.
So, what is financial literacy, why is it important, and why should an entrepreneur care?
Financial literacy is the ability to understand and use various financial skills, including personal financial management, budgeting, and investing.
For example: knowing the difference between saving and investing. Both aim at increasing the amount being put away, but one might come with a higher risk/higher reward, i.e., investing.
Now there are several important benefits for being financially literate.
Understanding how much the entrepreneur earns and spends is the baseline of financial literacy, and this goes beyond the world of entrepreneurship: departmental budgets, organizational budgets, household budgets.
Once the entrepreneur has a budget, track spending to ensure those purchasing costs remain within the budget. In fact, there are several budgeting methods that I would encourage the listener to research to find one that may fit those specific budgetary needs.
Financial literacy also helps understanding how to avoid debt. Now debt may be unavailable, so understanding how to limit that debt is a part of financial literacy.
Seeking out a lower interest rate and comparing terms can save a substantial amount of debt over the long term.
Take the purchase of a home for example. Understanding the difference between a fixed interest rate and an adjustable rated mortgage could be anywhere from a few hundred to a few thousand-dollar difference, and this is also true with small business loans, personal loans, credit cards – anything that has an interest rate attached to it.
Another example is a home equity line of credit for example. Avoid refinancing a home to take a vacation or purchase something that is not providing the same amount of equity it is costing to pay back that loan.
Spending more on a remodel than the value the remodel will provide in return is a sunk-cost, which means money that has already been spent and cannot be recovered.
Having financial literacy also helps the entrepreneur protect themselves! In this episode we talk about rainy day funds also known as an emergency savings account.
Ideally, this saving account should hold 3 – 6 months' worth of expenses. This strategy can also provide protection from bankruptcy.
Lastly, please secure for retirement. Financial literacy includes understanding retirement, stock vs. Bond, IRA vs. 401k. This will help the entrepreneur begin to establish generational wealth.
Generational wealth includes financial assets — such as property, investments, money, or anything with monetary value — that can be passed down from one generation to the next, and that is why an entrepreneur should care.
Gaining education in financial literacy allows the entrepreneur to build a better future for our communities, for our families, for our economy.
As one former guest once said, “if our community isn’t doing well, our businesses never will”.
Together, we are a community.