Become Financially Literate Now with Bill Pratt of The Money Professors!
Bill Pratt is co-founder of the financial education company The Money Professors. He is also an author and associate professor of business at Piedmont Virginia Community College in Charlottesville, Va. Bill started his career as an economist for the federal government, became a vice president at Citigroup and then left the financial industry to focus on helping students become personally and financially successful. By making the best decisions with the right attitude and information, Bill believes that people will accumulate wealth faster and will be able to use that wealth to improve the lives of those around them.
Hi Bill! Thanks for taking the time to pass along some insights on financial literacy! Can you start by telling us a little bit about The Money Professors and how you got involved?
The Money Professors as a company was formed when three personal finance instructors combined their financial literacy efforts to reach outside of the university setting. Previously the three had spent years educating students and adult learners with various seminars, books, etc. By combining our efforts, we have been able to deliver a strong, consistent message that emphasizes that personal finance is easy, relevant, and fun when approached the right way.
How would you define the term “financial literacy”?
Financial literacy is simply the knowledge and ability to make “informed” financial decisions recognizing that personal finance is personal and that ultimately no one is in a better position to decide what is best for you than you.
What would you say is the current state of financial literacy in the U.S., and how does that compare to other countries?
Clearly the state of financial literacy in this country is very poor. This is evidenced by the fact that most people do not have an emergency fund. We know that emergencies happen. But because people do not understand the impact on their finances they fail to plan for them.
Furthermore, at every age level we are behind in our retirement savings. The average person does not understand the most powerful financial tool they have—the time value of money—and so they fail to take advantage of it.
What can someone do to become more financially literate?
First, don’t fear personal finance. It is much easier than the industry would have you believe. Next, start reading books, or listening to podcasts, and take at least one course at the local college or wherever a class may be available.
The next step, if you want to get more serious, is to hire a financial coach. It is reasonably cheap to do so, and they can really accelerate the learning curve from a few years to just a few months. The key is don’t follow the crowd because most people are broke—so don’t do what they do!
How does life change once you become financially literate?
It’s not that one’s life becomes different by becoming financially literate, it’s that one’s life becomes better. The biggest stressor people have is money. When you become financially literate you have the confidence to know that the decisions you are making are the best ones for you.
In reality, knowing how your money is working is actually less stressful and provides more freedom than “not worrying about it” or just hoping things work out. After all, hope is not a strategy.
The key is: knowing is only half the battle. It is really about taking action. For instance, I read “Men’s Health” magazine. I can read an article about losing weight three or four times and still not lose a single pound! Apparently, I have to actually implement what I learn to make a difference!
What are your top tips for someone who is new to budgeting and managing their finances on a regular basis?
- Don’t expect to get it right at first. Budgeting is iterative – you have to estimate, make adjustments, estimate a little better, make some more adjustments, etc.
- Don’t make it too complicated or you will never stick with it. Start with three categories:
- What I have to spend that is fixed (mortgage, car payment, etc)
- What I have to spend that is variable (utilities, gas, food, etc.)
- What I have left over (if any)
- If your budget is too tight or there’s nothing left over, adjust your variable expenses where you can. Afterward, adjust your fixed expenses over time—pay off car loan, refinance mortgage if appropriate, etc.)
- Use multiple bank accounts (can be at the same bank) to separate your fixed bills (must-pay fixed) from your regular spending money (must-pay variable) and another for your “play money,” which is everything else. Don’t even get a debit card for the must-pay fixed account. This money is paid with check or direct debit each month. It keeps you stress free from wondering if you accidentally spent your rent/mortgage payment when you had a fun weekend or a big Christmas or holiday spend!
- Set goals. This way when you decide you don’t have enough for something, such as dining out, you realize you are not really giving anything up — you are simply achieving your goal of paying off a debt, taking a vacation, etc.
- We teach a system called S.P.E.N.D. for financial success!
Save for emergencies
Plan your purchases
Establish financial goals
Never let others spend your money for you
Don’t forget non-monthly expenses
- Start an emergency fund – it is the difference between a crisis and an inconvenience when something happens (such as a car repair). Start small and keep adding a bit to it so it eventually becomes as large as your largest monthly bill (such as mortgage or rent). Eventually, you will want it even bigger, but not until your overall financial situation is solid.
Any other thoughts, tips, or recommendations?
Start now with setting some financial goals! The sooner you get started, the sooner you can begin to achieve them. Nobody does this the right way at first—and we all continue to make mistakes—even those of us who are experts. After all, we are humans who make emotional decisions—and emotional decisions are rarely ever good financial decisions. The main advantage we have is that when something goes wrong in our financial lives, we no longer see it as a financial problem—we only see it as a future classroom story!
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