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As the old saying goes: “Money makes the world go around”.
For almost everyone, it’s a necessity to have enough money for daily living and, hopefully, along the way have some extra money for special or luxury items, plus some for investment, perhaps in multifamily syndications. Having said this, there are people who simply can’t manage their income or savings and accordingly run into problems with debt or not having enough money to live on.
Indeed, financial literacy in the US and Canada is surprisingly relatively low, with more than 60% of adults rating their financial knowledge as “fair” or “poor”.
However, there are ways to address this inability to manage money, so this week let’s have a look at why being financially literate is an essential skillset.
What is financial literacy?
Being financially literate means that a person has the ability to understand and effectively use various financial skills, including personal financial management or management of their income and expenses. Then there is budgeting for, amongst other things, daily living expenses and, perhaps, investing.
A strong foundation of financial literacy can help support various life goals, such as saving for education or retirement, using debt responsibly, running a business of making wise passive investment in real estate to capitalise on available opportunities..
Unfortunately, people who are not financially literate may frequently run into problems with debt and are generally more vulnerable to financial fraud. This is becoming more prevalent, especially in the online internet age.
Why being financially literate matters
There are many skills which fall under the topic of financial literacy, but the most common example is household budgeting. Ideally, monthly household income should always exceed expenditure so that the householder has some savings for non-essential items at the end of every month. These savings can be used to buy a new car, take a holiday or make a passive investment into a multifamily real estate syndication.
Invariably most people have a mortgage and, almost certainly, credit card debt. Learning how to manage and pay off debts effectively and evaluate the pros and cons between different credit and investment products is also becoming more important in the modern world.
Often financial literacy skills require at least a working knowledge of key financial concepts, such as simple or compound interest and the time value of money. Given the importance of finance, lacking financial literacy can be very detrimental to an individuals’ long-term financial solvency.
What are some of the purposes of being financial literate?
So, if you ask: what is the purpose of financial literacy, one answer can be that the lack of such literacy can lead to a number of problems, both in day to day life but also when people look to invest their money in stocks and shares or real estate.
Financially illiterate individuals are more likely to accumulate unsustainable debt burdens. This may either be through poor spending decisions or through a lack of long-term preparation. This can lead to permanently poor credit ratings, housing foreclosures when they can’t pay their mortgage, or even business or personal bankruptcy.
Indeed, the need for individuals to be financially responsible when faced with so many ways to spend money has become imperative.
How to improve your financial literacy
Learning and practising a variety of skills related to budgeting, managing and paying off debts, and understanding credit and investment products is important for anyone wanting to improve their financial literacy. Some great ways to get started include:
Calculate and track all income you receive each month against how much you spend. Such a budget should include income such as salary or rent or dividends from investments. Add in fixed, regular expenses such as rent/mortgage payments, utilities or loan payments. Also include discretionary spending on non-essentials such as eating out, shopping, travel, and savings;
Whenever possible set aside a fixed amount every month for savings before allocating funds to the rest of your expenses;
Managing payment of bills:
To avoid late payment penalties, make payments by automatic debits account or bill-pay apps, and, if necessary, sign up for email, phone, or mail payment reminders;
If you have major debts, reduce spending and increase repayment, especially for loans with highest interest rates. It’s also worth trying to renegotiate repayments, consolidate loans, or even if you have to join a debt-counselling programme.
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CPI Capital believes that financial literacy is crucial when considering passive investment in multifamily syndications.
Being financially literate helps passive investors:
- Better understand investment risks, enabling investors to evaluate the sponsor’s track record, market trends and financial projections;
- Evaluate investment returns by comprehending complex financial metrics such as cash flow, internal rate of return (IRR) and equity multiples;
- Assess tax Implications, understand tax strategies, deductions and the impact on their overall tax situation;
- Analyse investment documents, including private placement memorandums (PPMs) and operating agreements.
In summary, CPI Capital encourages a high level of financial literacy when considering investment in multifamily syndications. This equips investors with the knowledge and skills to achieve their financial objectives through passive real estate investments.
CIO, Co-Founder CPI Capital