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A COMPLETE GUIDE TO FINANCIAL EDUCATION PLANNING
Definition, goals, importance and more
Financial education planning refers to the combination of credit, financial, and debt management skills that are necessary for making informed financial decisions. Financial education planning includes understanding how to avoid debts, how checking accounts works, using credit cards, and the right investment choice. In general, financial education planning has a material impact on individuals and families as they balance between their daily budget, children’s education, buying a home, and saving for retirement. Lack of financial education affects people’s ability to avoid financial pitfalls, manage financial risks, and understand the financial landscape. Financial education planning frameworks support the teaching progression of financial education. The are designed to promote financial curriculum in schools, Personal Social Health and Economic (PSHE) education, and mathematical knowledge.
Table Of Contents
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Objectives of Financial Education Planning
Financial education panning aims to create awareness and educate investors on access to financial services such as tax planning, financial planning, and investment management. It creates awareness of the availability of different types of financial products such as banking, mutual funds, stock market, wealth management, and professional advisory. With this knowledge, investors can make decisions on how to effectively manage their funds to achieve financial goals. Financial education also makes consumers understand their responsibilities and rights in the market as clients of financial services. As a result, it creates a financially aware and empowered society able to manage funds more effectively. Another objective of financial education is to develop the right standards of competence in areas of risk management, wealth management, financial planning, and investment advisory. Financial education planning provides the necessary infrastructure for business owners and members of the public to develop the appropriate skills to become credible financial analysts and planners.
Importance of Financial Education Planning
To make the most of financial trends
Financial education planning improves skills and knowledge on money and the economy, putting an individual in a better position to take advantage of the trends taking place in the economy. It equips individuals with the ability to spot economic situations such as the existence of a market bubble or inflation to avoid making poor financial decisions. Selling or buying assets when the market is volatile due to a lack of financial knowledge can lead to a huge loss. Therefore, financial education planning allows individuals to know how to align personal income with the existing economic trends.
To avoid monetary misadventures
Another essential element of good financial education planning is the ability to differentiate between legit and non-legit monetary ventures. Poor terms on investment or possibility of money-grabbing schemes. Financial education allows individuals to recognize the unsound investments and the jargons that scammers in the financial industry may use. As a result, investors can identify the right investment terms and financial planning schemes that can have more positive outcomes.
To prepare for emergencies
Financial issues are highly unpredictable because the economy keeps on changing. Financial education panning is a great way for investors and business owners to safeguard themselves from unforeseen financial situations. Learning budget personal finances and how to react in the event of unpredicted situations in the market can make a significant difference in financial stability. Financial education planning raises individuals’ critical thinking skills to get out of tight spots they may encounter.
To grow wealth
Individuals and businesses have one common goal: to live high standard lives by growing sufficient money for their needs. To achieve financial goals and live a comfortable life requires knowledge of financial management. Financial education planning equips individuals with investment skills to ensure that they do not outlive their savings. Since capital appreciation can only result from effective investment management in either the short or long term, financial education is essential to help all entrepreneurs and investors seeking to grow wealth. Therefore, it is important to acquire financial education planning to consider the right investment options that offer significant income returns.
To reduce the tax burden
Taxes are a burden to many investors, entrepreneurs, and families. Paying a lot of taxes increases the expenses incurred by an individual or a business when paying bills for different investment properties leading to low income. Financial education planning on tax planning helps individuals learn new ways to reduce their taxes without infringing the tax law. Tax planning skills act as the right way to hold together assets and capital to reduce the tax burden. Companies and families should seek financial planning to reduce taxes paid on bank interest and capital tax during investments, which contribute to financial strain. Thus, financial education ensures that investors reduce the tax bills in the correct ways resulting in more improved financial stability.
To make long-term goals
Solid financial education planning helps individuals to accumulate the skills and knowledge necessary to act as their own financial advisors. Getting access to financial education early enough allows individuals to begin putting the knowledge into practice to achieve long-term financial goals. The sooner they can put together the financial education plan, the more time they have to accomplish long-term goals. The difference in objectives and goals that one can achieve is a major reason why financial education planning is vital.
Advantages of financial education planning
Reduces monthly expenses
Financial education planning equips individuals with knowledge on how to calculate monthly income and expenses. It allows consumers to prioritize what is next in line determine what is needed most. Since it also covers insurance planning and wealth management, individuals get an insight into how to lower their premiums and taxes to accrue more wealth.
Offers saving skills
Business owners, investors, and families need to have a savings account that acts as a protective barrier in case of any cash flow problems. Financial education planning helps them develop saving skills and the importance of anticipating unforeseen events. Saving skills also help individuals avoid debt, provide a greater sense of financial freedom, and reduce stress.
Improves budgeting
Many families and businesses face the challenge of budgeting due to a lack of financial literacy. Budgeting is considered tedious, restrictive, and time-consuming. Individuals who can budget effectively are more financially secure. Through financial education planning, business owners can learn how to manage their money, identify risks, and plan for the future. Effective budgeting also requires certain skills such as decision making and focusing on long-term goals, which can be achieved through financial education planning.
A 529 College Saving Plan
A 529 college saving plan is an investment account that provides tax benefits when individuals use it to pay for education expenses. This plan was established after Section 529 was introduced to the Internal Revenue Code, granting tax-free tuition programs for qualified college students. A 529 plan can be used to pay for k-12 tuition, college, student loans repayment, and apprenticeship programs. Using a 529 plan to save for college means that the savings have less impact on financial aid eligibility. A 529 college saving plan works by investing after-tax contributions to ETFs, mutual funds, and other types of investments and waiting for them to grow. The investment grows over a period on a tax-deferred basis, and individuals can withdraw the money tax-free if needed for qualified college expenses. A 529 college saving plan is considered advantageous because it offers tax benefits and flexibility to families because it does not have an annual contribution limit.
Contributions towards 529 college saving plan
There are no specified annual contributions to a 529 plan; however, individuals have to make important considerations when making a contribution. The amount of contributions varies between different states. Every state has an average contribution for a 529 college plan ranging from $235,000 to $529,000. In addition, the amount an individual contributes depends on the price of attending the college, including the cost of textbooks and boarding. To determine the amount to contribute towards the 529 college saving plan, individuals should use the rule of thumb to save one-third of the estimated college cost. This rule assumes that students can cover the remaining two thirds through student loans and scholarship funds.
How Arrowroot Family Office Can Help You in Financial Education Planning
Arrowroot Family Office helps different clients achieve different competencies of financial education planning. The financial advisors at Arrowroot Family Office promote financial education through the following competencies: Earning, saving and investing, spending, borrowing, and protecting. By understanding these competencies, individuals gain the ability to manage their finances for a lifetime of financial stability.
Earning: Earning refers to obtaining money from return on investments, self-employment, or a job. Arrowroot Family Office realizes that employment opportunities may be scarce, making it difficult for individuals to earn enough money for their financial needs. Even for those who are employed, taxes and other deductions reduce the amount of net income. It is important to understand net versus gross in a paycheck in order to manage income effectively. Arrowroot Family Office helps its clients understand different concepts such as local, state, and federal individual income tax imposed to avoid confusion when they get a paycheck. With this information, individuals have a clear view of their total earnings and can manage their finances effectively.
Saving and investing: Saving and investing requires the understanding of financial services and institutions available. Arrowroot Family Office offers financial education on key areas of surrounding saving and investments. Some of the components in saving and investments include risk mitigation, price levels, interest rates, diversification, and indexes. Arrowroot Family Office ensures that all clients are equipped with enough knowledge on saving and investment to make smart decisions that may result in an increased flow of income.
Spending: Spending is the reflection of personal values, financial behavior, and lifestyle. Arrowroot Family Office helps its clients differentiate between wants and needs in order to control spending. Arrowroot Family Office also emphasizes the importance of budgeting to help investors and families allocate their income effectively to achieve their financial goals.
Borrowing: Arrowroot Family Office recognizes the benefits of college education but also acknowledges the financial challenges that many students face in financing it. The cost of a college education is constantly increasing, and families need to gain financial education planning for better borrowing plans. Most students have to take loans to finance their education. Financial education helps them know how to create a good repayment plan to turn the loans to their advantage. Investors also take loans to boost their businesses or create self-employment. Arrowroot Family Office helps all clients with borrowing skills to help them repay the loans on time and turn them into future investments for wealth accumulation.
Protecting: Protection involves insurance, retirement planning, and emergency planning. Arrowroot Family Office equips its clients with all levels of protection, including life, wealth, social levels, and protection through financial education planning. Financial advisors help every client understand the issues surrounding insurance coverage, risk management, fraud, and identity theft, to master family and self-financial protection in life.
Frequently Asked Questions
What is the meaning of financial education planning?
It refers to the combination of credit, financial, and debt management skills that are necessary for making informed financial decisions. It is about the ability to manage money, create a budget, and how to invest funds for future use.
What are the main components of financial education planning?
There are five main components of financial education planning:
- Prioritizing Saving Money
- Basics of Budgeting
- Understanding Debt
- Financial safety & Identity Theft
- How Investing Works
Who needs financial education planning?
Every person needs to have financial knowledge and skills, from children, college students to investors and entrepreneurs. The main components of financial education are taught in colleges and universities. Financial education is also offered by Arrowroot Family Office financial advisors to adults and entrepreneurs who cannot attend colleges.
Why is it important to be financially literate?
Financial education planning is important because it prepares individuals with the skills required to manage funds and ensure they do not struggle financially. It helps individuals take control of their debts and investments, learn how to budget, and avoid fraud. Without financial literacy, investors and business owners are left vulnerable to misappropriation of funds.
I am on a tight budget. How can I save?
Saving is a great challenge, especially for individuals earning a low income. To save while on a tight budget, one should make small changes on the budget to reduce expenses. Focusing on long-term goals instead of short-term goals can help achieve personal goals by saving a small amount of money.
Is borrowing a good idea?
Borrowing for investment is an effective way of increasing potential returns for investors. However, borrowers should have a clear investment strategy to avoid incurring losses if things fail to work out.
Is financial education planning effective?
Evidence shows that school-based financial programs are effective in improving students' knowledge and skills in the management of finances. Other programs offered by company financial advisors have also helped millions of entrepreneurs gain exceptional knowledge on choice of investment, identification of frauds, and budgeting.
What are the main principles of financial education planning?
The Financial Industry Regulatory Authority (FINRA) outlines five key principles that underline financial education planning. They include; earning, spending, saving and investing, borrowing, and protecting.
What is the importance of insurance funds in financial education planning?
Insurance planning is an essential factor in financial education that ensures individuals have a clear plan for protecting loved ones, their business, or property in case of an accident. Unexpected events such as job loss or death can be difficult to adapt to without an insurance plan. Therefore, financial education planning encourages the need for contingency planning to avoid being caught unaware.