Culture Politics

Financial Literacy 101: The Course You Never Took

This piece is written by Priya Lasrado, one of Spicy‘s Guest Contributors.

You hear it said time and time again amongst millennials, especially as awareness of social and economic inequities become more obvious – “Why do I know that the mitochondria is the powerhouse of the cell, but I don’t know sh*t about taxes or banks?”

The outrage is not an unfair one. Our education system provides us with many essential tools to navigate the outside world, but when it comes to finances, the burden falls on us. Of course, we’re not aware of the burden until… well, we’re bearing it. Once we’re at this point of just simply trying to understand how to balance a budget or how to file your taxes, we don’t seek to know more. Why? Because the rules are constantly changing (the IRS literally puts out new regulations every year), the jargon is dense (sorry, what’s a non-qualified versus qualified account?), and we simply don’t have the time.

These are subtle tools of oppression. How could you know that you can take business deductions for rental income if no one taught you that and you can’t afford a good accountant?

Here are some tips/tricks/good things to know so that even if you’re not making as much money as you’d like to, you can still stay informed and take steps toward financial literacy and independence.

  1. If you’re paying off student loans, you can lower your taxable income (the amount of money you pay taxes on each year, e.g., your salary, bonuses, etc.) by up to $2500. 
  2. If you are investing, open up an IRA (Individual Retirement Account).
    •  What is an IRA? An account set up for your retirement. You contribute money and can buy/sell and own stocks, mutual funds, and ETFs (more on these latter two later) within the account and the money you contribute pre-tax.
    •  The money you contribute to IRA accounts is tax deductible, up to $5,500. If your job doesn’t offer a retirement plan (e.g. a 401k or 403b, etc.), you can deduct your full contribution amount. *Bonus, you have until the tax-filing date (April 15th 2019) to make a deductible contribution for your 2018 taxes!
  3. Allow me to contradict myself, if you can, open a Roth account. 
    •  What is a Roth account? A Roth IRA is a retirement account (like an IRA) where you can also buy/sell the same kinds of assets in IRAs, but the money you contribute to it is not tax-deductible (i.e. the money you contribute is after-tax).
    •  While the money you contribute to a Roth IRA or 401k is not tax-deductible, it does grow tax-free. So, if you’re trying to look out for cool, older, sipping sangria on the beach on the coast of Spain in retirement you, make Roth contributions! To make a point, if you bought 10 shares of Apple back when they made their Initial Public Offering (IPO) on the stock exchange at $22/share and you owned it in a Roth account, all $124,223 in gains (the money you made from that genius investing decision) would be available to you tax-free. So retired you can opt for the first-class flight to Spain. 
  4. Open up a checking/savings account with an online bank.
  5. You don’t have to buy stocks/follow the markets to invest.
    •  “Invest your money” is probably the most (read: “only”) solid advice that every single old rich white guy says. But on this one thing, they may be onto something. It is intimidating to enter the market, but there are investments called Exchange-Traded Funds (ETFs) and Mutual Funds, which offer market exposure without having to be sunk into one company.
      •  In short, an ETF is a “basket” of different stocks and bonds. There are ETFs for different purposes, (e.g., for an aggressive investor versus maybe a more conservative one) you just have to do a little research.
      •  A mutual fund is basically the same thing, except a portfolio manager who intentionally picks out what to invest in manages it. This means they are a bit more intentional than ETFs, since ETFs are generally just an index that tracks the market. With that said, mutual funds also tend to have a higher expense associated with them (because you’re paying someone to manage it!).  
  6. If you want to invest, look for firms that don’t have investment minimums and low fees.
  7. You’re going to hate me for this one, but… track your spending.
    •  My advice is not to stop buying your morning coffees and invest that money instead. Or to stop buying new shoes or to stop treating yourself. Why? Because life is hard and sometimes we deserve nice things. Also sometimes, life isn’t hard, and we still deserve nice things.
    •  With that said, we should be conscious of what we spend. It’s hard to face, but when there’s leftovers in your fridge and you just pressed “Checkout” on your fifth Seamless order of the week and it’s only Wednesday… maybe it’s time for a bit of a reality check.
    •  Apps like Mint allow you to stay on top of what you’re spending, will notify you when your bills are coming due, and will give you a free credit score. Sometimes, seeing is believing (and by believing, I mean sometimes I cannot believe that I spent $95 on Lyft rides in one weekend. Yes, real number).

This is, of course a lot to take in and learn at once. But, if we have time to learn these things and ease into them, we can set ourselves (and our offspring should we have them) for a future that is on much more even ground with our more well of compatriots.

Many people say life is about living within our means. This may hold truth, but what life is also about, is working to become more. Sorry to quote your corny 6th grade history teacher here, but knowledge really is power. And if any of what you read here helps you become more financially aware, literate, or emboldened, then I think you are well on your way to finding and creating your power.