By Randy Hughes, founder/ CEO of Counting Pennies
Nationwide — We see it every day… in movies, commercials, and the internet. People on billboards or other advertisements, smiling uncontrollably, running through open fields, watching sunsets on white sand beaches (while drinking their lattes). Every day we are bombarded with “If Onlys”… promises of financial success “if only” we do this or “if only” we do that. And many of us— while we sit in traffic on our way to another long day in the office— ask ourselves, “I’m smart… I work hard… Where’s my latte? Where’s my beach?”
Here are 5 financial terms that you hear often, but may not fully understand:
#1 & 2 – Financial Independence/ Financial Freedom: Financial independence and financial freedom tend to be used interchangeably. Financial independence/freedom is the point where income from your assets and residual earnings exceeds your basic monthly and recurring expenses. Typically, a person who enjoys financial independence or has financial freedom is not dependent solely on one source of income. Normally, there are various streams of income that contribute to his/her financial situation.
A common misconception is that people with big homes, multiple homes, fancy cars, or exotic vacations are financially independent or enjoy financial freedom. That is not necessarily true. Some people have these items but have 60-80 hour professional work weeks. Others accumulate credit card and loan debt in an effort to give the appearance of financial independence and freedom. Neither of these classes of people are truly financially independent or financially free. Further, people that live from paycheck to paycheck are not financial independent or financially free.
#3 – Financial Security: While financial independence and financial freedom tend to focus on the dollars and cents of a person’s financial situation at a given point in time, financial security adds the element of a person’s peace of mind combined with the perception or belief that the state of financial independence and freedom will continue for some period of time.
Generally speaking, people who are financially secure are not only covering their basic monthly expenses, but also have a substantial savings and asset portfolio that can be tapped or drawn from if necessary. Typically, income exceeds expenses several times over, and one or two bad investments or financial setbacks are not likely to change or impact their standard of living or spending decisions.
#4 – Financial Literacy: Financial literacy is the ability to understand how money works and how to manage it. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources. Unfortunately for many, understanding how money really works and how to best use it to one’s advantage is not a skill set. One example of financial literacy would be knowing what to pay and when to pay it.
#5 – Financial Responsibility: Financial responsibility is the ability to put financial literacy to work for the well-being of one’s financial situation and financial future. Being financially responsible is similar to eating or drinking responsibly. We may know what is good for us but sometimes we need assistance in identifying and making healthy choices. Likewise, it is not enough to understand money… you have to know how to make the right choices that will serve you, your family, and your business well in the long run.
Financial responsibility is what helps to keep all of us grounded. Before we think about the $1 million home-based business, the endless shopping spree, or the incredible tax refund, we have to understand that without financial responsibility, none of those scenarios can be real. Regardless of if you are rich or poor, white-collar or blue-collar, employed or not, no one can enjoy success long-term without financial responsibility. The good news is, anyone can learn to be financial responsible!
Randy Hughes is the CEO/ founder of Counting Pennies, an affordable nationwide tax preparation firm that helps hundreds of families across the country prepare their tax returns, and maximize on tax credits and deductions. The firm also offers affordable tax planning, bookkeeping, financial coaching, and other services. Contact them directly at (800) 234-1449 or visit www.cpennies.com