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10 Lessons For the Financially Illiterate

Aaron Crowe
Written by Aaron Crowe

The financially illiterate — whether they’re children or young adults — should know some basic personal finance lessons before they go out into the world.

And avoiding bad habits shouldn’t just apply to the young. Adults of any age can learn bad financial habits that are passed down from generation to generation, creating a cycle of poor financial decisions that they keep repeating while remaining financially illiterate.

Teaching the financially illiterate

“Many young people look to their parents for guidance on money issues,” says John Vento, a certified financial planner and author of a book on financial independence. “Unfortunately, many parents lack a strong understanding of financial matters, and as a result, they miss opportunities for saving, lending, and basic financial services.

“We need to break this cycle — and one way to do so is to make financial literacy an educational focus in high schools, colleges, and universities,” Vento says.

To help end the problems of the financially illiterate, Vento has a lesson plan that he says should be taught in the nation’s high schools and colleges. Here are 10 of his lessons for the financially illiterate:

1. Live within your means

This requires living on less than your take-home salary and any other resources you receive, such as income from an annuity or a trust, he says. Living within your means does not mean existing from paycheck to paycheck.

Living within your means does not mean living on credit or on loans, or turning to parents or friends to pay the tab when you cannot quite meet the rent or need to buy a new computer. It means not only figuring out how to pay for your needs and wants, but budgeting your income so that you still have a little money left over.

“The single most important step any individual must take to become financially independent is to commit to living within his or her means,” says Vento. “In addition to living within your means, if you are ever going to get to Point X, you must also save money,” which he recommends be 10% or more of your gross pay.

2. Understand taxes

The average American family pays more than one-third of its income in federal, state, and local income taxes — and even more in property taxes, excise taxes, sales taxes, and other hidden taxes, such as taxes on cigarettes, liquor, and certain luxuries.

You don’t have to know the U.S. Tax Code by heart as a financially illiterate person, Vento says. But 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, he says.

3. Determine your financial position

This doesn’t mean simply knowing your annual salary or identifying how much you take home in every paycheck — although that is definitely part of it and a key understanding for the financially illiterate.

Know what your financial assets, liabilities and net worth are, and regularly track where all your personal funds are coming from and going to. Determine your financial goals for various timelines, such as five and 10 years, and throughout your retirement.

4. Manage debt

There’s good debt and bad debt, a fact that the financially illiterate may not know. Basically, good debt is money that people borrow for purchases and situations that, in the long term, will help them amass wealth and ultimately reach Point X, Vento says. Some examples of good debt include student loans, business loans, certain investment asset loans, and some personal-use asset loans (such as an affordable home mortgage).

About the author

Aaron Crowe

Aaron Crowe

Aaron Crowe is a freelance journalist in the Bay Area who specializes in personal finance. He has been a writer and editor at newspapers and websites, including AOL's personal finance site, WiseBread, Bankrate, LearnVest, AARP and other sites. Follow him on Twitter at @aaroncrowe, or at his website,

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