Financial vulnerability is a tragic fact of life for many hard-working Americans. Despite being the world’s largest economy, our adult financial literacy rate is only 57%. This shows how many people lack a good understanding of how to make smart decisions about their money.
Remember, when we talk about being financially literate, we’re don’t mean understanding the different kinds of mutual funds or how to invest in the stock market. On the contrary, we’re talking about the fundamentals of managing basic personal expenses like mortgages and credit cards — which many Americans cannot do effectively. Don’t imagine that this is a problem only for workers at the lower end of the pay scale either. Middle-class economic security is also on the decline, largely due to personal debt. (Anyone remember the housing bubble of the mid-2000s?)
This Is My Problem How?
As leaders, we need to understand that financial stress can take a heavy toll on the mental health and physical wellbeing of our teams. We should be doing our part to address the systemic failures that have allowed financial illiteracy to permeate our society.
By helping our employees to handle their financial woes, we help lift this burden from them. That allows them to focus on their job responsibilities and thus improve productivity.
The Good News
Money issues can be overwhelming. Additionally, many people see them as deeply personal and are embarrassed to ask for help. The good news is that a little education can go a long way.
Let’s look at the basics of personal finances to see how we can begin to tackle these challenges:
Budgeting
Creating a budget provides the foundation for financial planning. You must understand where your money comes from and where it goes.
Firstly, find out what you earn after taxes. This will be the basis of your budget.
Next, choose how you want to allocate your money. One popular budgeting plan is the 50/30/20 plan. It looks a little like this:
- 50% of income is for “needs” which include mortgage, insurance, groceries, gas, and all other living expenses. They are non-negotiable.
- 30% covers “wants” such as entertainment, travel, and take-out.
- 20% is to save, save, save. This can start as an emergency fund, which you should always have first; but you can also use it for retirement or investments to help eliminate debts.
Remember, this is just one example. It’s important to find a budgeting plan that fits your needs and financial goals.
Lastly, identify where money is being spent needlessly and target (with extreme prejudice) toxic lines of credit that are contributing to the debt cycle.
Avoid Debt Traps
Given our relatively low level of financial literacy, it’s not surprising that many people don’t understand the true costs of borrowing. If you have or plan to borrow, educate yourself first so that you can make an informed choice. Make sure you understand the basic types of interest, so you know whether you’re dealing with simple, compound, variable, or fixed interest rates.
In addition, know a few rules of thumb for borrowing/using credit:
- The higher the interest rate, the faster you want to get rid of that debt.
- Always pay more than the minimum monthly payment.
- Pay the entire balance on credit cards each month to avoid more fees. If that’s not possible, consider cutting other expenses or avoid use altogether until you can.
- College students, never borrow more than what you actually need!
Get Informed
Unfortunately, financial wellness is something that most schools don’t teach. Luckily, there are several resources that can help fill in the missing pieces of the fiscal puzzle. If you’re already in a debt trap, a financial planner or accountant probably isn’t an expense you want (or can afford).
Instead, you may benefit from a few free online courses on finance or some budget software. Edx.org offers free online courses in personal-finance, like this one. Also, if you have a LinkedIn account, hop over to LinkedIn Learning for courses on finance, free with membership. (One-month free trial subscriptions are also available.)
Build Financial Literacy Into Professional Development
As I already explained, helping employees get control of their finances can help alleviate stress, improve morale, and increase productivity. This makes financial literacy programs an ideal addition to professional development training.
Additionally, your team’s new money-savvy doesn’t apply exclusively to their personal finances. You may find that they bring those same insights to financial decisions that directly impact your business’ bottom line. That can easily recoup any costs involved with setting up the program.