Chain of confidence - laura rowley

September Resolutions

Ever since I was kid, September felt like the beginning of a new year, much more so than January. September is a month of snowy white new gym sneakers, crisply sharpened #2 pencils, vivid boxes of fresh crayons and unblemished folders, a time of fresh starts, of resolutions, of getting back down to business. So here's a resolution for this September: Devote one hour a week to improve your financial literacy.

"Research shows over and over that financial illiteracy is widespread, not only among the poor or uneducated, but even people with college degrees," says Dartmouth College economist Annamaria Lusardi. "There is nothing easy about finance. These are often difficult decisions for people who don't have a lot of financial sophistication."

Lusardi and researchers from Harvard devised a short three-question quiz to test knowledge of some basic concepts that are key to personal finance decisions. Only a third of adults in their 50s answered all three questions correctly. And in a survey conducted last year, researchers created a hypothetical example of credit card debt with a specific interest rate; only 36 percent of respondents could correctly identify how many years it would take for the debt to double.

"This is critically important, because if you don't fully grasp interest compounding, how do you appreciate the importance of starting to save early?" asks Lusardi. "People who heavily underestimate the power of interest-rate compounding were the people who had too much debt." Those who did understand compounding were more likely to be saving for retirement.

Financial literacy starts with the big picture: understanding where your cash is going so you can live within your means, erase expensive debts, and start building wealth. One tool that may help you along the way is Mvelopes.com. I subscribe to this online budgeting system. It's based on the old-fashioned envelopes system your grandparents may have used; they would get their weekly paycheck in cash, and put a certain amount of cash in an envelope marked "food," another in one labeled "utilities," "clothing," "entertainment" and so on. When the envelope was empty, they simply stopped spending.

Mvelopes.com works the same way. You create "virtual" envelopes for each of your spending categories, then electronically link your checking and savings accounts, debit and credit cards to the program. You "fund" each if your envelopes (rent, food, clothing, entertainment, etc.) for the month based on your paycheck.

Now let's say you have $200 in that "clothing" envelope. You spend $50 on your credit card at a shoe sale at Macy's. That spending shows up in a "new transactions folder." You click and drag the Macy's transaction to your "clothing" envelope, which decreases by $50 - so now the envelope reads $150. It's crystal clear how much you have left to spend in that category to stay within budget for the month. I like Mvelopes because it lets me plan my spending and stay on track - versus adding up my receipts later and realizing I spent too much money after the fact.

As you get a handle on your cash flow, pick the one area of your financial life that troubles or excites you most -- whether it's paying off your credit cards or planning to buy your dream home - and spend an hour this week educating yourself through an online site like Yahoo!Finance or a money magazine.

Then spend an hour next week, the following week and so on, continually refining your knowledge, visualizing your goals and devising the action steps you'll take to achieve them. Write out the goal and put it right in front of you on your desk at work, or on the fridge at home. Hopefully, by the time the holidays roll around, you'll have mastered the topic - and achieving that goal can be your New Year's resolution for 2010.