Why is financial literacy important?

When traveling to a new place for the first time, a map is critical to keeping you on the right path. Much like a map, financial literacy can help lead you down the path to reaching your financial goals.

With the right resources, it’s easier than ever to learn about money and finances at your own pace, no matter how much prior experience you have. This article will demystify financial literacy and show how you can get started on the road to understanding money management for yourself, and for your family’s future.

What is financial literacy?

Financial literacy is the ability to manage your money and make progress toward future financial goals. While some people confuse the terms “financially literate” and “wealthy,” you don’t need to be on the Forbes 400 to be financially literate because the concept isn’t tied to a specific income. You can start on the path to financial literacy, regardless of how much you make or what you do for work.

There are multiple areas in life where you can focus on being financially literate, including the following:

Budgeting

Do you have a household budget? Budgeting helps you to create an effective plan for managing income and expenses. It involves tracking what you earn and spend, setting financial goals, and making adjustments to ensure that income covers expenses while leaving room for savings, investments and an emergency fund.

Saving and investing money

Financial literacy emphasizes the importance of saving money for both short-term and long-term goals. It involves understanding different saving and investment options, such as savings accounts, certificates of deposit (CDs), stocks, bonds, mutual funds, and retirement savings accounts. Knowing each option’s pros and cons, risks and potential returns, and possible role within a well-balanced portfolio, will help you make informed financial decisions.

Managing debt

No one likes the feeling of owing someone else money, but sometimes a small amount of well-managed debt can improve your credit score, enabling you to make future investments like buying a house.

To be financially literate means knowing how debt works and how to manage it responsibly. This involves knowledge about different types of loans, interest rates, credit cards, and credit scores. It also includes developing strategies to avoid excessive debt and effectively paying off existing debts.

Banking and beyond

Financial literacy extends to your understanding of the roles and functions of various financial institutions, such as banks, credit unions, and insurance companies. It also involves knowledge of financial services, such as checking accounts, savings accounts, loans, and insurance policies, and being able to compare and choose the most suitable options.

Finally, financial literacy includes knowing your credit score and creating a plan to raise it if you’ve got a low score.

Why is it important?

Financial literacy can help you create a plan toward goals like saving enough money for a home, going to college, or preparing for your family’s financial future. Added benefits of financial literacy include:

• Personal financial management: Financial literacy helps you to create budgets, track expenses, save money, and make informed decisions about investments, loans, and insurance. When you’re confident in your finances, you’ll probably feel better about your ability to pay for college or buy a home in the future.
• Building wealth and security: Financial literacy provides you with the tools and knowledge needed to build wealth and achieve financial security. When you understand concepts like compounding interest and dividends, you can make your money work smarter and
• Financial empowerment: Have you been putting off dreams because there always seems to be another bill to pay? Learning and maintaining money management skills can help you put aside money to fund home renovations, your next vacation, or other potentially expensive items you’ve been putting off.
• Avoiding financial pitfalls: No one wants to think that they could be the victim of a scam, but the truth is that financial fraud does exist. Empowered, financially literate consumers can detect potential scam patterns and debt traps.
• Leaving a legacy: If you have children, modeling financial literacy can help them develop their own understanding of money and finance. (It might also help you leave a financial legacy for them.) Consider providing them with an opportunity to earn an allowance, and encourage them to save a portion of it.
• Talking money: Whether it’s with a spouse or partner, your employer, your colleagues, your friends or your family, you will have an easier time broaching the always-delicate topic of money if you understand what, precisely, you’re talking about. (Or what questions you’re not asking, but should be.)

How do you achieve financial literacy?

Achieving financial literacy involves a combination of learning, practice, and ongoing effort to improve your understanding of personal finance. Here are some steps you can take to enhance your financial literacy for the future.

Educate yourself

Learning about money doesn’t require a trip back to college or thousands of dollars in student loans. There are plenty of free, engaging resources you can use to learn more about finances. Read books, articles, and reputable websites that cover topics such as budgeting, saving, investing, debt management, and financial planning.

Set financial goals

Clearly define your financial goals, and consider both short-term and long-term planning. Some goals you might want to consider could be saving up a down payment for your first home or paying off a credit card balance in full. Setting specific goals will help you stay focused and make informed decisions that align with your financial objectives.

Create a budget

Develop a budget that reflects your income, expenses, and financial goals. Track your spending, categorize expenses, and identify areas where you can adjust or cut back. Budgeting helps you manage your money and allocate resources effectively. It can also help you predict expenses you might run into later down the line, so it’ll be less stressful when it comes time to pay for them.

Practice saving and investing

Start saving money regularly, even if it’s a small amount. Set up automatic transfers to a savings or investment account to make saving a consistent habit. Gradually increase your savings as your income grows. Learn about different investment options and consider investing in low-cost index funds or other suitable investment vehicles to grow your wealth over time.

Remember that financial literacy grows over time, like the interest you earn on money in your savings account. Keep reading, learning, and saving, even if you only have a few minutes a day to pick up a book or you can only afford to invest a few dollars from each paycheck. Something is always better than nothing.

How do you maintain financial literacy?

Financial literacy should be an ongoing effort. Here are some ways to maintain your financial literacy as you learn and your life’s needs change.

Manage debt responsibly

Did you know that there are different types of debt? Before you take on debt, know exactly what the terms are and what you’ll pay for your financing in interest. Avoid taking on excessive debt and prioritize paying off high-interest debt as quickly as possible to improve your credit.

Stay flexible

Your life is constantly changing, and so are your financial needs. Stay curious and continue to learn about new developments in personal finance. Adapt your financial strategies as your circumstances change or new opportunities arise. Join financial communities, attend workshops, or participate in online forums to engage with others and gain insights.

Follow financial news

Stay updated with financial news and trends. Follow reliable sources that provide insights into the world of finance, including stock market updates, economic indicators, and personal finance advice. This helps you stay informed about current financial events and make smart decisions with your money.