A Good Heart Isn’t Enough: Three Things You Have to Know to Be Financially Literate

Do you know someone whose financial approach is all heart and no brains? To steward assets well, you need more than a good heart to navigate the financial opportunities and challenges you encounter. In recognition of Financial Literacy Month (April), this blog will briefly explore why discerning stewards need to be financially literate and highlight three key areas where raising financial literacy can make a significant difference.

So, what does financial literacy look like? Financial literacy is defined as “the ability to understand and make informed decisions about money.” In practicality, it represents someone who understands the basics of money and finances well enough to make good decisions on the big things in life.

Now I can almost hear the objections. Some would argue, “Jesus wants our hearts, and that is enough.” Yet Jesus told a parable in which seeds were sown on four types of ground and only thrived where the gospel was heard and understood. In the other three places, the seed didn’t thrive because people didn’t understand, couldn’t persevere, or were overcome by worry and the deceitfulness of the world. Financial discipleship, like all of discipleship, requires more than just our hearts.

Others would scornfully respond, “What do you expect me to do, become a financial planner or a stock analyst? There is no way I could ever learn everything about finances.” No one expects you to! For example, I would describe myself as biblically literate. I’ve read the Bible multiple times, studied it, and taught classes. Yet I don’t speak any of the original biblical languages and have a lot to learn. Literacy isn’t perfection; it’s a solid grasp of the basic issues.

Now that the case for literacy has been established, here are three important areas where you can focus your efforts.

1. Understand how taking on risk has been rewarded historically.

If you want your investments to create wealth, rather than maintain it, you need to invest in stocks. A diversified portfolio of large U.S. stocks has averaged around a 10% return over the past few decades. International stocks have been around 6%. The longer you hold stocks, the less volatile the returns become. There are no guarantees, but many people who are hesitant to take risks have inadvertently limited their spending, saving, and giving out of fear of investing in the broad stock market.

2. Know how your accounts are taxed now and in the future.

There are three basic account types: Taxable, tax-deferred, and tax-free. A brokerage account is taxable, a regular IRA or retirement plan is tax-deferred, and a Roth IRA or retirement plan is tax-free. Charitable tax-saving strategies, the choice between traditional and Roth retirement accounts, and risk targets by account type are all determined by tax rates. Even if you’re not the one creating the plan, a financially literate knowledge of tax rates will help you better evaluate a plan someone else created.

3. Track your spending.

Your spending plan doesn’t need to be overly complex or sophisticated, but you need to know how to prepare a basic budget and track where your spending is going. I’ve seen budgets with fifty categories, and I’ve seen budgets with three. They all can work. Pick a budgeting approach that works for you.

What if you hate handling finances? Can you get someone else to do it for you? The answer is yes, but only up to a point. Financial advisors or consultants can create plans, but without some degree of financial literacy on your part, it’s hard to set priorities that align with your values. A base level of literacy also helps you persevere when markets drop, enabling you to continue fulfilling the financial goals you have set for yourself, your family, and the charitable causes you hold dear.

If you’re ready to take the next step in wisely managing and stewarding what God has entrusted to you, visit the Orchard Alliance Financial Literacy Page, where you’ll find practical articles, insights, videos, and financial calculators to boost your financial literacy.