The term “financial literacy” is often intimidating for those who are unfamiliar with it. It seems like a thing that only people from certain social and professional backgrounds have to understand. But in reality, financial literacy should be accessible to everyone.
Whether we like it or not, how we handle money bleeds into all other parts of our lives. Regardless of a person’s financial and social status, everyone needs to understand how to properly manage their finances to live free of debt.
If you consider the practicality of promoting financial literacy in your community or organization, you have come to the right place.
What Is Financial Literacy, and Why Does It Matter?
Investopedia defines financial literacy as the capability to grasp and use different financial skills for personal finances and investments. The extent of your understanding of it dictates how well you handle your money. Rather than seeing it as a one-time thing, however, financial literacy is more a journey that lets you improve as you keep learning.
Financial literacy is so important because so many people today are not confident about their retirement plans, from working millennials to middle-aged professionals.
A survey by TD Ameritrade shows that almost two-thirds of adults in their 40s have saved less than $100,000 for their retirement. Another survey by the same organization also says that 66% of millennials do not believe they are on track towards their retirement plans.
Numerous factors affect one’s financial status, of course. Sometimes, personal emergencies are a factor. Others might be preparing for big investments, such as getting the best deals for cars or looking for the most fitting mortgage rates for a home. These can alter how freely one can use their money.
Still, not understanding how to manage finances and maximize opportunities for income growth keeps many in debt. It also prevents people from preparing for their future. Financially literate adults are best positioned to build a comfortable future for themselves.
First Things First: Basic Practices to Know
Financial literacy covers various skills that allow individuals to budget their money, pay their debts, and make the right investments. Here are the primary strategies to get people started on the journey to financial freedom.
1. Make a monthly budget.
The best way to understand how your money works is to determine your budget. This makes you pay attention to where your money comes from, where it is going, and consequently how you should adjust both according to your needs.
Use a spreadsheet or download a budget tracker for easier planning. Write down the specifics of your sources of income, your bills, your groceries and other expenses, and the amount you set aside for savings and investments. When you have them all laid out, you can easily see if you live within or beyond your means.
Don’t just include your necessities and regular payments in your budget. Factor in the amount you spend on shopping and other extras for each month, too.
2. Understand your credit reports and credit score.
Federal law states that individuals can request free credit reports from these three organizations: Equifax, Experian, and TransUnion. Everyone is entitled to one free copy every 12 months from each company, which means you can get yours thrice a year.
Firstly, accessing your credit report lets you see how timely your payments have been. It also gives a breakdown of your loans and payments, which allows you to point out discrepancies and prevent fraud and theft from occurring. To get the most of your credit reports, space out your credit report requests so that you can keep track of things regularly.
You should also know your credit score. Credit reports don’t provide your credit score, but free monitoring services online compute this for you. The things recorded on your credit report affect your credit score, which tells you if you are eligible for mortgages and other loans.
3. Set the right priorities.
Finally, becoming financially literate means knowing where you should be placing your money and acting upon it. A good way to make sure that your savings account builds up with time is to set aside an amount each month for savings and work around that for the rest of your expenses and other responsibilities. By putting savings and investments first, you make sure that you do not sacrifice these in favor of less important things.
And by teaching people financial literacy, they learn to become financially independent and financially stable.