5 Financial Lessons to Learn

May 19, 2014
Laura Joszt

Americans seem to be notoriously bad at finances, and they know it. However, few seem to do anything to rectify the problem when all they need to do is learn a few simple lessons.

Americans seem to be notoriously bad at finances, and they know it. However, few seem to do anything to rectify the problem when all they need to do is learn a few simple lessons.

In the aftermath of the financial crisis, the need for personal finance education has never been greater, according to John Vento, president of the CPA firm John J. Vento, CPA, PC, and the CFP firm Comprehensive Wealth Management, Ltd.

“Part of the reason the 2008 financial crisis had such a widespread reach is that many Americans simply didn’t have the financial literacy to protect themselves in such a crisis,” Vento, author of Financial Independence (Getting to Point X): An Advisor’s Guide to Comprehensive Wealth Management, said in a statement. “They lacked the firm understanding of fundamental financial concepts and strategies and the ability to manage money responsibly.”

The lack of financial knowledge persists as young people look to parents, who do not have a strong understanding of financial matters, for guidance on money issues. The only way to break the cycle is to make financial literacy a focus in school, according Vento.

“I truly believe the most dangerous threat to our nation and its citizens is a lack of financial literacy,” Vento said. “Americans still struggle to make wise financial decisions because these concepts are not a focus in our education system. So when we reach adulthood, it’s either sink or swim—and too often we make bad financial decisions and suffer the consequences later in life.”

Understand taxes

Taxes are the biggest expense a person pays in his or her life, and there are more taxes than you probably realize.

According to Vento, the average American family pays more than a third of its income in federal, state, and local income taxes. Beyond those, however, there are property taxes, excise taxes, sales taxes, and more to consider.

“Most people do need help from professional tax advisors to benefit from tax strategies; however, you should have enough basic knowledge about taxes and the tax system to ask the right questions and find the appropriate help to suit your own unique financial and tax needs,” Vento said.

Careful tax preparation and planning can reduce your personal tax burden and prevent you from paying more than is absolutely required. America’s tax laws are incredibly complicated, but even just a basic understanding of the tax system is useful.

Manage debt

Debt shouldn’t be as scary as most people make it out to be. Understanding the difference between good debt and bad debt is important for people to become financially independent.

Although it’s a strange idea for some, good debt is money borrowed that, in the long term, will help amass wealth—think student loans and mortgages. Bad debt is money borrowed for nonessential expenditures—for instance, your credit card.

“When you do not use debt properly, that can lead to significant financial hardship and can prevent you from ever becoming financially independent,” Vento said. “However, when you use debt to leverage yourself in the pursuit of accumulating wealth, it can be a very powerful tool.”

Insure your health and your life

Proper planning can all fall apart if you haven’t considered the effect of unexpected health or life issues. A prolonged illness, a severe injury, a disability, or death can cause money amassed from years of careful planning and investing to slip away.

Planning for these events is especially important for physicians, whose high income often makes them the primary wage earner and is difficult to replace if they can no longer practice medicine.

According to Vento, the premiums paid on your health and life insurance provide peace of mind with the knowledge that your family will be protected.

“Having the right kinds of health and life insurance at the appropriate stages of life is as important as the insurance itself,” he said. “Your particular situation will determine what type of insurance you need, what kind of policy or policies will work best for you, and the amount of coverage you should carry.”

Plan for retirement

It’s been said before: you’re never too young to begin planning for retirement. This is especially important as retirees face new issues that weren’t a concern 20 or 30 years ago, like longer lives.

Time is one of the most valuable assets on your side. The more years you save, the greater the chance of your financial success. Saving for retirement can be as easy a contributing to your employer’s plan or simply opening an IRA.

“Implement a retirement saving strategy that allocates a specific dollar amount or percentage—I recommend at least 10%—of your salary every pay period,” Vento said. “Therefore, you are paying yourself first, as though saving for retirement is your number one required expense. In fact, saving for retirement is not an expense because it adds to your investable assets, but treating it as such is of utmost importance to your success.”

Preserve your estate

Without the proper estate planning, the federal and state governments could get a larger amount than you would like, leaving less to your loved ones. Without taking the necessary steps to preserve your estate, assets may even go to relatives with whom you have not spoke in decades, according to Vento.

Once considered just for the very wealthy, that is no longer the case. Many people might be comforted by the idea that proper estate planning is assuring their family’s financial security even after their deaths.

“[Estate planning] can significantly reduce estate taxes, administrative costs, and assure that your loved ones will be taken care of,” Vento said. “It allows you to dispose of your assets as you see fit, with consideration given to your heirs’ individual needs.”