How to Improve Your Financial Literacy
You have probably heard the term “financial literacy” before, but most people do not truly understand what it means. Here is a quick explainer on what financial literacy is and why it is so important.
What is Financial Literacy and Why Is it Important?
Financial Literacy is the ability to understand and effectively apply financial concepts. These concepts embody areas on personal finance such as investing, debt management, budgeting, and retirement planning. Having a low degree of financial literacy can cause people to make poor financial decisions that result in them losing their money. Without a basic understanding of how to create a budget, how investing works, and how to manage debt, you may find yourself living paycheck to paycheck, unable to get ahead.
Your financial literacy is something that will grow as you go through life and make decisions about your money. As adults, we make decisions nearly every day that require we have a grasp on personal finance basics. For example, getting insurance is a financial transaction, joining the pension plan at your workplace, getting a mortgage, or even buying a car.
How Can You Improve Your Financial Literacy?
Budgeting
Creating a budget is the first step in taking control of your finances. A budget will allow you to have full understanding of where every dollar you spend is going. A budget gives you the power to use your money in a productive way and to stop spending frivolously. Your budget should include your income, fixed expenses (mortgage, car, grocery etc.), optional spending, and savings.
Pay Attention to Your Credit
Credit is your ability to borrow money or secure loan and it is not something most people pay much attention to until it is too late. Your ability to secure credit will dictate whether you can buy a house, buy a car, or even set up a payment plan with a phone company. So, what can you do about bad credit?
The first step is knowing what bills you have that are contributing to your credit score. Credit cards are the obvious culprit for most people, but bills such as car payments, phone payments, and internet bills can all contribute to your credit score. Ensure that your bills are paid on time and any amount in arrears is paid off in full. With credit cards, try to pay more than the minimum payment each month. This gives your credit a positive boost.
While bad credit is a known culprit in blocking borrowing, a lesser-known issue is having no credit. If you have never had a credit card or other loan, then you may find yourself having the same issues as those with bad credit. If you find yourself in this situation, consider taking a small personal loan to help you build your credit. Personal loans require that the loan be repaid in installments, so there are no surprise payments, and will contribute to your credit score.
Pay Yourself First
It can be tempting to treat yourself when your paycheck hits your bank account. However, your first expenditure should be your savings account. By committing to your savings goal before any discretionary spending, you can rest assured that you have taken care of yourself and will be prepared for any unexpected expenses that may arise in the future.
Your budget will help you understand what you can (and should) deposit to your savings each pay cycle.
Start Investing
Once you create your budget, have a plan to manage your debt and have a savings strategy, you may want to consider investing. Investing is the best way to grow your money and hedge against inflation. While investing can seem complicated, there are many services and companies available that make investing a breeze. Most investment companies allow you to employ a set-it-and-forget-it strategy that takes most of the work out of investing.
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