How Financial Literacy Can Lead You to Generational Wealth

Are you working towards generational wealth? Are you familiar with financial literacy? If not, it’s easy to learn. You can take small steps today that can lead to big rewards down the line for you and your family. If you need a refresher on what generational wealth is, check out my post on 22 Ways to Create Generational Wealth for your Family Now.

Today I want to focus on Financial literacy because even with the best ideas and tips, it will be difficult to build generational wealth without a basic knowledge of how money works.

Financial literacy is the ability to understand and use financial skills such as personal financial management, budgeting and intelligent investing to make wise financial decisions.

So, here are several ways financial literacy can lead to generation wealth and how you can easily become educated!

The Principles of Financial Literacy

Without financial literacy, all of our decisions around money will be made without the foundation for success.
According to The Federal Financial Literacy and Education Commission, there are 5 key principles of financial literacy, which are:

Understanding how much you earn, which includes your pay, benefits and tax withholdings
Knowledge of how to save and invest your money (i.e. having an emergency fund and being able to set aside money for short and long term goals).
Understanding how to safeguard your money by utilizing insurance and avoiding fraud.
The ability to wisely spend money via budgeting and comparison shopping.
Understanding how to borrow money (get a loan) at the best interest rate possible, and how to keep your credit healthy with smart and responsible repayment habits.

Understanding Your Pay

Understanding how much you earn, can help you build generational wealth by providing a clear dollar amount for your monthly budget. If you don’t understand how taxes impact your yearly income, you could end up overspending or even owing money to the IRS.

You should also have a clear knowledge of how the benefits from your employer impact your yearly earnings.

For example, many employers will offer a matching contribution to your 401K based on a percentage of the amount YOU pay in. You should always pay the max amount possible to get the highest matching contribution from your employer. It’s basically free money!

If you don’t understand your paycheck and benefits, plan a meeting with your HR department or see if your company offers financial planning.

How to Save and Invest Money

Saving and investing money is the primary way to build generational wealth. Understanding where to put your money can make a huge difference in your retirement savings. These nest eggs can be passed onto future generations after we are gone. The best way to have healthy retirement savings is to have a diverse portfolio of investments

This means utilizing the stock market, contributing money to high yield savings accounts, creating passive income and more.

Most companies have 401K programs that handle stock market investments for their employees. If you want to invest additional money in the stock market, you can meet with a certified financial planner or try an investment app which makes getting into the stock market easy and accessible for beginners. Here are the top apps for 2021:

You should also put money in high yield savings accounts that give you the biggest returns for keeping your money in one spot. Here are some Stand Out Online Savings Accounts from NerdWallet.

To save even more, you can create passive income streams that continuously bring you money with minimal effort after setup. This is a great way to boost your bottom line each month. Check here for some easy ideas.

You can also start one of these 20 Side Hustle Ideas that require little money to get started.

Don’t forget about your kids when it comes to saving! Kids financial literacy is important and this usually starts with learning how to save money. Create a savings account for your kid early and let those funds build and build over the more than a decade they will be in your home. Teach them the principles you are learning, too! You can cater these ideas to their level of understanding and incorporate more complex concepts as they grow.

How to Safeguard Your Money

You can’t pass on generational wealth if it’s not there to give. Make sure you take steps to protect your identity and insure your financial investments.

Homes are often our biggest assets. Make sure you have adequate home, fire, flood and earthquake insurance (depending on where you live). You should also have insurance for your vehicles and consider contributing to a life insurance policy.

Life insurance is a way to care and provide for your loved ones in the event of your death. These policies can guarantee your family has the resources they need to prosper and have opportunities for success, even in your absence.

You should also take steps to protect YOU. Our identities are always at risk, especially in an increasingly cyber world. Check here to learn the important ways to protect your identity from Experian. And here’s a general list of things to do:

Protect all your devices with passwords.
Use a Password Manager.
Keep an eye out for phishing attempts.
Never provide personal information over the phone.
Check your credit reports on a regular basis with sites like Credit Karma or through your banking app.
Protect sensitive documents like your social security card.
Limit your exposure (the number of credit cards you carry and other sensitive information).

Budgeting and Comparison Shopping

You can’t build generational wealth if you live beyond your means and fail to find ways to cut spending.

Each person’s budget will look a bit different based on income and expenses. But, everyone can follow the rule of 50/30/20.

This means that 50% of your income should go to essential expenses (mortgage payment, car payment, insurance, etc.)
30% of your income can be contributed to your wants (things like cable, subscription services and eating out).
Finally, you should make it a priority to save 20% of your income or use this allocation to pay off debts as quickly as possible.

Here are the best online budgeting and savings tools for 2021 to get you started with a savings and spending plan.

And if you want some frugal living tips to help you cut back, check out my posts for Frugal Living Tips that Will Help You in a Pinch and Back to School Savings Tips That Will Save Your Coins.

Understanding Loans and Credit Cards

The best way to learn about loans is to sit down with a banker or loan officer who can walk you through the ins and outs. Try utilizing a Black Owned Bank near you or online. These banks typically offer financial literacy courses and take a special interest in their communities and patrons. They also specialize in providing loans to people that other banks may deny and education on important credit principles.

Read here to learn more about how Black Owned Banks Can Support Your Financial Needs for Generational Wealth.

I’ve spent a lot of time learning how to improve and maintain good credit. Without good credit, you’re less likely to be offered loans for a home or car, your payments for cars and homes (and even things like cell phones) might be higher and you could be prevented from using financial tools that build wealth.

If you have bad credit or want to improve your credit, be sure to check out the following posts:

Final Thoughts on Financial Literacy

I hope you learned something from each of the different principles of financial literacy and how they can help you obtain generational wealth. Make money management and education a priority in your household and don’t undervalue the importance of kids financial literacy. Teach your children to value a dollar from a young age and you’ll be amazed at the results.

Never let the amount of your income keep you from setting goals and making plans. Regardless of how much you make, you can take steps towards creating generational wealth through financial literacy and smart decision making, today!

If you liked this post, you can find all of my tips and advice for Career & Finance, here. And as always, sharing is caring! Be sure to pass this information onto your family and friends and let me know what you plan to do to improve your financial literacy!