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Over 40% of U.S. adults struggle to make ends meet, and around one-third of Americans have experienced material hardships – such as running out of food, being unable to pay rent, or skipping medical treatment, says CFPB’s report. That’s a pretty shocking statistic.
Now, imagine if everyone in the U.S. – or even better, in the entire world – is financially literate and has the skills to avoid such hardships. I know, wishful thinking, but learning financial basics can get us closer to this ideal.
This post will dive into what financial literacy means, why it’s important, how it impacts your life, and simple ways to start improving it.
What Is Financial Literacy?
Financial literacy is a fancy way of saying ‘knowing how to manage money well in a smart and efficient way.’ It means knowing how to budget, save, and invest. It doesn’t mean you need to be a pro at these things. You just need to make them work for you. It’s being aware of your finances and where your money goes each month, and making sure that it gets you closer to achieving your financial goals.
Why Financial Literacy Matters?
You might wonder why this matters at all. There are plenty of reasons to get better at managing money. Let me show you.
1. It Improves Personal Financial Health
When you know how to handle money wisely, you avoid overspending and taking on high-interest debt. You’re also more likely to save for emergencies. All these choices lead to better financial health and, over time, help you build wealth.
2. It Reduces Financial Stress
Making smart money choices means you’re prepared for any unexpected expenses. That reduces the stress that comes with financial uncertainty. With a solid plan, you’ll feel more secure about your future and sleep easier at night.
3. It Helps You Reach Long-Term Goals
Understanding finances makes it easier to save for long-term goals – like retirement, buying a home, or becoming financially independent. Making smart choices with how you spend your money allows you to accomplish anything you set out to achieve.
4. It Benefits the Economy
Being financially aware is a great choice for the overall economy. When people manage money well, they rely less on government help. They also contribute more to the economy through investments and entrepreneurship as one of the financial literacy skills is being able to earn more money whether it’s through investing or building your own side income streams.
Key Areas of Financial Literacy
Let’s look in more detail at the basic components of smart money management.
Budgeting
A budget helps you see where your money goes each month. A good budget is realistic and it aligns with your goals and values. It lets you live within your means, prioritize essential expenses, and set aside money for repaying debt, savings, and future goals.
One of the strategies you can follow is the 50/30/20 budget rule where 50% is spent on needs (housing, groceries, utilities), 30% on wants (eating out, entertainment), and 20% on savings and debt repayment.
Savings and Emergency Funds
Once you know your monthly expenses, you need to set aside money for emergencies such as a medical bill or a car repair. It doesn’t have to be a huge amount right away – just start small and save regularly. Over time, even small amounts add up and bring you peace of mind.
Managing Debt
There are two kinds of debt: “good debt” and “bad debt”.
Good debt, such as a mortgage or a student loan, can increase your net worth. The first provides you with a material asset that most likely will increase in value over time. The second provides you with better career opportunities and increases your earning potential.
Bad debt, such as credit card debt, doesn’t add value to your life in the long run.
Knowing the difference and paying off bad debt quickly helps keep your finances on track.
Understanding Credit
Your credit score is a number that shows how responsibly you manage your finances. It’s what lenders use to decide if you’re a good candidate for a loan or not.
Even if you’re not thinking about getting a loan now, your credit decisions today can affect your future. Check your credit report regularly, take steps to correct any mistakes you might find in it, pay bills on time, and avoid high balances on credit cards.
Investing Basics
Once you’ve mastered budgeting and saving, it’s time to get your money to work for you. Investing is putting your money into assets like stocks or bonds with the expectation that it will grow over time.
It’s basically giving money to strangers. Your hard-earned money, may I add. So before you start investing you need to understand the basics. Once you do, you will be better equipped to make smart decisions that will bring you profit rather than cause you losses.
Earning More
Maybe instead of investing in someone else’s enterprise, you’d rather invest in yourself. Being able to earn more, whether through your career or a side hustle, is a great way to improve your financial health as well as secure your future. The financially savvy try not to rely on only one source of income but create multiple sources and this way make themselves more resilient.
Retirement Planning
It’s never too early to think about retirement. Starting to save when you’re young means more time for your money to grow through compound interest. But even if you’re getting a later start, don’t worry, it’s never too late – it’s always better to begin than to put it off indefinitely. You will thank yourself later.
Common Barriers to Financial Literacy
There are many reasons why most of us don’t manage finances wisely. Here are a few common reasons:
Lack of Education
No one really teaches us about money. In some households, the subject of money is still taboo. Let’s change that! Money is not taboo. Money is an everyday part of our lives and without us understanding it, it controls us.
I have never received any formal education in managing my finances. I learned a bit from my parents, and the rest from books, online resources, and mainly trial and error.
Social Influences
Social media are a great invention but, as with everything, they need to be used in moderation. What we are shown on social media needs to be taken with a grain of salt. Trying to keep up with trends and fads or living a lifestyle beyond one’s means pushes us into bad money decisions, which in turn ruins our financial health.
Financial Jargon
Finance often comes with confusing jargon. Once you break the jargon down, into small chunks, you can understand it without any problems. In case there are any terms you’d like to check, take a look at the Financial Terms Glossary page on this blog.
How to Improve Your Financial Literacy
Improving your financial skills doesn’t have to be overwhelming. Here are some easy steps to get you started:
Keep Reading This Blog
This blog is here to help you. I will be explaining the above-mentioned concepts in more depth, and providing you with easy-to-follow steps to improve your financial health.
Self-Education
Following from the point above, there are so many great resources available to learn about finances. These resources, whether books, blogs, or podcasts, make these concepts easy to understand. Some of my personal favorites include:
- Investopedia – for articles and tutorials on a wide range of finance topics
- The Balance – for easy-to-follow guides on budgeting, debt, and investing
- Khan Academy – for free video lessons on savings, budgeting, and more
Use Financial Tools
Apps and tools for budgeting, tracking expenses, and calculating finances are available to make things easier. Don’t be intimidated by these tools—they’re there to help you stay organized. In this blog, I will be recommending the ones I find helpful.
Build Good Financial Habits
Being financially literate isn’t about knowing the terms. It’s about creating good habits and systems that work for you, like tracking expenses, setting goals, living within your means, and regularly reviewing your finances. Small, consistent steps lead to big results over time.
Seek Professional Advice
You can do a lot by yourself, however, you don’t need to do all of it alone. That’s why it could be worth it for you to consult a professional financial advisor to help you organize your finances and make informed financial decisions. Trying to organize your whole financial life by yourself might be overwhelming so having an outsider take a fresh look might help.
To wrap things up, being financially literate is a powerful skill that helps you take charge of your money, make smart choices, and build a more secure future. Knowing how to budget, save, invest, and plan for later in life gives you the confidence to handle whatever financial challenges come your way. By learning these basics, you’re investing in yourself – and it’s totally worth it.
Let me know your thoughts in the comments.
Disclaimer: I am not a financial advisor, and the content on this blog is for informational purposes only. Investing carries risk, so it’s important to do your own research before making any financial decisions. The information shared on this blog is not intended to be financial advice or a suggestion to invest in any particular asset or strategy. For personalized advice, please speak with a licensed financial professional who can assess your unique situation and goals. Ultimately, all investment decisions are your responsibility.
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