This blog post is about an important but not always exciting topic, financial literacy. As in nursing, the financial industry has its own language and theories. Learning them can empower you. Read on to learn about financial literacy and its importance for your financial and retirement plans.
What is financial literacy?
Think of financial literacy as clinical jargon and theory. As nurses, we have a specific language we use to communicate with one another. We also learned clinical theory, the textbook way to deliver care. Without these standard approaches, care would be chaotic and the outcomes less ideal. Financial literacy follows the same premise. The financial industry has its own jargon and theories. Strengthening your financial literacy helps you stay informed to improve your financial outcomes.
Why is financial literacy important for nurses?
As a new nurse administrator, I remember sitting in a room with experienced nursing leaders watching the bantering and attempts at control. The most successful leaders focused on budgets and what was best for the hospital. They had command of their numbers.
Think of financial literacy in the same way. When you understand financial language and theory, you can use it to focus on what is best for you. A bonus is that you can also apply financial literacy to your professional life, should you decide to go into a leadership position.
Financial Literacy Terms
Decoding Financial Language: A Basic Glossary
Financial literacy relies heavily on understanding the language. Once you learn it, you can use the language to help you make better financial decisions. Let’s review important A to Z financial terms.
401(k): Retirement Savings Account
A retirement savings account offered by employers, often with matching funds. 401(k) accounts help you save pre-tax earnings for your retirement.
Amortization: Gradual Debt Repayment
Asset: What You Own
Assets are items of value that you own, like cash, property, or investments. They contribute to your net worth and can produce income or appreciate.
Spreading your investments across a medley of asset types to help mitigate risk.
Strategically overseeing your investments with a focus on growth potential.
Crafting a financial strategy similar to a nursing care plan. Budgets assess your income and expenses to help ensure you’re not overspending. Budgets also help you know the amount left over to save for your goals.
Capital Gains: Profits from Asset Sales
Capital gains are the profits earned from selling an asset at a higher price than its original purchase price. They can be subject to taxation.
Compound Annual Growth Rate (CAGR)
The yearly growth rate of an investment considering compounding effects.
Compound Returns (Compounding): Returns on Returns
Compounding refers to returns earned or paid on the original principal and any accumulated growth. Compounding can help your investments grow exponentially. The longer your money is invested, the more pronounced the effects of compound returns. By reinvesting any growth, the goal is to increase your money. But debt is also subject to compounding when you carry a balance and pay the monthly minimum.
Credit Score: Your Financial Reputation
A standardized number creditors use to measure your creditworthiness. Credit scores help lenders decide whether to offer you a loan and the interest rate. A higher score can lead to better loan terms and financial opportunities.
Your amount of credit in use. Credit utilization impacts your credit score.
Monies you owe to creditors or lenders.
Debt-to-Income Ratio: Balancing Your Financial Health
Your debt-to-income ratio shows the percentage of your income used to repay debt. A lower ratio shows better financial health and borrowing ability.
Depreciation: Diminishing Asset Value Over Time
Depreciation refers to the decrease in the value of assets over time due to causes such as wear and tear, technological advancements, or market fluctuations.
Diversification: Spreading Your Investments
Diversification aims to help reduce risk by investing in different types of assets. The goal of this strategy is to help protect your investments during market fluctuations.
Periodic payments a company may give to shareholders from profits. Dividends are not guaranteed.
Money set aside for unexpected expenses or life events.
Equity: Ownership Stake in Assets
Equity represents your ownership interest in assets such as real estate or businesses. Equity helps determine your net worth.
Unchanging regular costs like rent or insurance premiums.
Inflation: Decrease in Purchase Power
The gradual increase in prices of goods and services over time, eroding purchasing power. Investing in assets that outpace inflation or provide protection may help protect your money.
Interest: The Cost of Borrowing
Interest is the fee you pay when you borrow money. It’s important to understand how interest rates work and their impact on your loans. Your credit score helps lenders decide your interest rate.
Investing: Making Your Money Work for You
Investing involves putting your money into assets to help generate returns over time. Investing aims to build wealth to help you achieve your financial goals.
IRA (Individual Retirement Account)
A personalized retirement account. Tax benefits vary depending on the IRA you choose.
Liabilities: What You Owe
Liquid Assets: Easily Convertible Investments
Liquid assets are investments that can be quickly converted into cash without significant loss of value. Liquid assets help provide financial flexibility and are essential for managing unexpected expenses.
A loan to acquire real estate, often with a fixed interest rate and repayment plan.
Your total earnings after accounting for taxes and deductions. Net income is your “take-home” pay.
Net Worth: Your Financial Portfolio’s Value
Net worth is the value of your assets minus your liabilities. It provides an overall snapshot of your financial health and progress.
A financial and lifestyle plan for your post-career years.
Your comfort level with the potential ups and downs of your investments.
Stockpiling funds for financial goals and emergencies.
Varying expenses such as groceries, entertainment, and dining out.
How to Use Financial Literacy
Understanding money management and finances can help you make better financial decisions to live the lifestyle you choose. Let’s explore how being financially literate can help improve your overall well-being. Here is a hypothetical case study on using financial literacy in a nurse’s personal life.
Jane is a registered nurse who has been working in a hospital for 10 years. She has always been good at managing her finances, but she wants to improve her financial literacy to make better decisions about her money. Jane decided to improve her financial literacy through self-study on the Internet. Here are ways Jane’s financial literacy has helped her improve her personal life:
Budgeting. Jane learned how to create a budget and set goals. Having worthwhile goals helps Jane stick to her budget. She now knows how much money she has coming in and going out each month, and she can plan her expenses accordingly. This has helped her save money and avoid overspending.
Investing. Jane learned about different types of investments, such as stocks and bonds. She started investing some of her money in a retirement account. Her savings are growing over time from the compounded interest.
Debt management. Jane learned how to manage her liabilities, such as credit card debt and student loans. With her budget, Jane developed a plan to pay off her debt. She also started making extra payments to reduce the interest she pays.
Financial planning. Jane learned how to plan for her financial future, such as retirement and emergencies. She put aside six months of living expenses into an emergency fund. This is helping her gain peace of mind. Jane understands the importance of compounding as it relates to saving and the cost of debt. She met with her Human Resources Department to review to make the most of her benefits. She opted into her employer matching retirement account. Jane knows the pre-tax money will help her save for retirement.
Overall, Jane’s financial literacy has helped her make better decisions about her money. This is helping her improve her financial well-being. She used her knowledge to start an emergency fund and to help her prepare for retirement. She met with her Financial Advisor to review healthcare costs and long-term care protection. And with an understanding of assets, Jane met with an attorney to create an estate plan. Increasing her financial literacy has helped Jane gain peace of mind knowing she is working towards a healthy and quality future.
In conclusion, financial literacy equips you with tools to help you gain confidence for your financial future. Learning the financial language and theories helps you with financial and retirement planning. By improving your financial literacy, you can apply the information to better manage your money and create plans for your future.
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All numeric examples and any individuals shown are hypothetical and were used for explanatory purposes only. Actual results may vary. The use of asset allocation or diversification does not assure a profit or guarantee against a loss.
Georgene Collins, RICP®, RN, PhD, MBA is a registered nurse turned Financial Advisor at Airey Financial Group. Georgene helps other nurses take control of their finances and prepare for retirement. Georgene began her career with Airey Financial Group in 2017 after retiring from 30 years in healthcare.
Georgene holds the Retirement Income Certified Professional (RICP®) designation from The American College of Financial Services. She holds health and life insurance licenses and a long-term care certificate in Indiana and Illinois. Georgene is a Registered Representative and Investment Advisor Representative and has earned the FINRA Series 63 and 65 registrations.