The term ‘financial literacy’ refers to one’s understanding of basic financial concepts and their ability to handle money well. The statistics on how a typical American handles money are pretty bleak. Also, over a quarter of them never save any money from month to month. 75% are in some form of debt. Improving one’s financial literacy can help avoid tough situations and allow people to make the most of their earnings.
Learn more about financial literacy: Being financially literate simply means that one can regularly make the right decisions that lead to the right financial outcomes. Having this skill set means that one can navigate around major financial issues such as emergencies, debts and investments. Understanding how to budget and knowing how to use sinking funds and retirement funds are important. When the National Financial Capability Test was given to over 17,000 Americans from all 50 states, fewer than 48% were able to pass a 30-question test.
Making the most of the money you have is the first step towards improving your financial literacy. Understanding how to use your bank account to accurately track what is coming in and what is going out is essential.
Setting up alerts to keep track of spending is a great option. Scheduling payments to make sure your bills are paid on time to avoid late fees is another.
Rescheduling based on when you receive your paycheck can also make things smoother.
Accumulating savings in your bank account, even if it starts out small, is extremely important. Even though it can be sustainable to live month to month, it is impossible to predict a financial emergency.
Unexpected expenses can be devastating and take years to recover from, so avoiding them is key.
Experts recommend having at least two bank accounts, one to receive paychecks and to pay bills as well as another for savings and non-regular spending. Installing a banking app on your phone will help you keep better track of all your accounts.
Once you have money in your account, you can start spending it.
The purpose of having money is to spend it, but it is important to do so wisely. It is vital to go over the things you spend money on in life and distinguish between what is a necessity, such as basic groceries, and what is a luxury, such as going to the cinema.
It is important to re-evaluate these every once in a while because people change as life goes on.
What was once a necessity may turn into a luxury and vice versa. If you get a raise or demotion, these can also change.
A great free app for managing your money is Mint. The next step is budgeting.
Every successful personal finance plan involves a solid budget plan. There are several ways to tackle this and no one way is the ‘right’ way.
The most logical is to sit down and write down all the expenses that you can think of. These can include rent, bills, transportation costs, etc.
This is easy when it comes to regular bills, but much tougher when estimating the cost of groceries, going out and other non-regular amounts.
It can be a good idea to track everything you spend for an entire month and then dissect it.
To easily track everything you spend in a month, you can use only your credit card and see the expenses written out point-by-point in your account.
However, it is likely that you will need to pay for some things in cash. There are free apps such as Monefy where you can log your expenses and sort them into categories.
It is important to figure out how much you really spend versus what you think you spend.
Payments can accumulate without one realizing and it may surprise you at the end of the month. Knowing is just step one, acting on it by creating a budget makes all the difference.
An effective budgeting plan will be able to do more than predict how much you will spend and save. It will create a plan on how to handle any accrued debt.
It will be able to effectively plan for ways to lower your monthly bills and expenses. Finally, it will enable you to distinguish between short-term and long-term financial goals.
Just like with anything in life, it is important to have an end goal in mind when it comes to finances. Whether it is a specific amount of saving, paid off bills or other goals.
The moment you get a credit card, it is important to watch your credit score. The bank will be tracking every cent you borrow, when or if you pay it off, and how you spend it. Caution should be used with credit cards because a single mistake can follow you for years.
It can be tempting to rack up a lot of debt because the consequences may seem minor at the time. Some monthly interest is worth getting a nice new laptop when your old one breaks. But it may prevent you from leasing a car, renting an apartment, or buying a house down the line.
Building a high credit score can help you get approval for low-interest loans, credit cards, mortgages and car payments. It is important to learn what helps your score and what damages it.
Using your credit card is actually great for credit. Especially if you pay off whatever you spend right away, it is great to use your card.
If you can’t pay it off right away, there is no need to panic as long as you can make your monthly payment. On the other hand, making late payments, constantly increasing debt and regularly maxing out your credit card can result in lowering your credit score.
Every financially literate person will tell you that savings should not be the last on your list of priorities when it comes to money. Statistics show that between 2011 and 2014, between 24 and 28 percent of Americans had zero emergency savings.
In addition to this, people between the age of 30 and 49 are least likely to have emergency savings. Having some money saved is essential to good budgeting.
Using a savings account will protect you from being unable to pay your monthly bills in case of an emergency.
Especially if you have debt to worry about, it can be tough to think about saving. But it is important to start saving as soon as possible. The best thing to do is to make a financial commitment.
It is okay to start small, even a tiny bit of your paycheck should go into savings every month. You may need to make sacrifices or cut other expenses to make this happen. Being intentional about only using savings for needs, not just wants, will help develop good habits.
Begin today by setting up an automatic transfer of a portion of your paycheck to go to your savings account.
Build Good Financial Habits
It takes time to build good and healthy habits, whether you are trying to eat better, start journaling regularly, or improve your financial practices. Research on habits varies, however many believe in the 21/90 rule. It states that it takes 21 days to make a habit and 90 days to make it a permanent lifestyle change. So keep in mind that changing your financial habits such as spending less can be just as hard as giving up casual smoking or drinking. The more you practice, the better you will get. Over time, you won’t even notice that you are doing it.
A study from Duke University in 2006 found that up to 45% of all our daily behaviors are automatic. This means that you spend 1 out of every 2 minutes doing something that you’re not even aware of.
With some work, practice and planning, being financially literate will become an automatic part of every day of your life.
Change is never easy, but it is 100% worth it to change a few habits in order to become financially secure.
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