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Editor's Note: When you graduated from High School, you probably had a decent grasp on grammar, history, and maybe even a firm grasp on the Pythagorean theorem. Once you turned 18, you were eligible for all sorts of credit cards and you might have made the decision to take out huge amounts of loans to pay for college.
Since school didn’t teach you about credit, personal finance or very much else having to do with financial literacy, you probably didn’t understand EXACTLY what you were getting into. I know I didn’t. There is a huge gap in knowledge of financial literacy and if your school or your parents aren’t informing you on the ins and outs, you’re going to have to take matters into your own hands.
That’s probably what brought you here - because you are a go-getter, and you’re seeking to be financially literate by any means necessary.
What Is Financial Literacy?
Financial literacy is the ability to understand—and manage—your finances through the use of skills like budgeting and investing. Without it, you’re more likely to live beyond your means, have a poor credit score (or no credit score at all), and face issues like bankruptcy or foreclosure. Luckily, though, there are a few main principles you can follow to develop and sustain the financial literacy necessary to live and retire comfortably.
Important elements of financial literacy include:
- Understanding how much you earn each month
- Improving spending habits to build wealth
- Saving and investing to prepare for your financial future
- Protecting your money from identity theft and other forms of fraud
- Committing to responsible borrowing and debt repayment
Why Financial Literacy Matters
Given the limited time spent developing financial literacy in school, it might be tempting to think that it’s not an important part of your daily life. But that couldn’t be further from the truth. In fact, financial literacy is key to developing healthy financial habits and, ultimately, the freedom to retire on your own terms.
In addition to learning how to budget, save, and plan for retirement, financial literacy can help you borrow responsibly, protect yourself from identity theft, and maintain a sustainable approach to your finances. Without expanding your financial literacy, you’re more likely to fall prey to risks of bankruptcy, foreclosure, and identity theft. What’s more, people who don’t spend time learning about their finances are less likely to be prepared for emergencies, unexpected expenses, and retirement.
Financial Literacy Example
Consider two sisters, Rebecca and Evelyn. Both attended college and graduated with top honors and no debt. Rebecca, decided to attend graduate school and took out about $20,000 in student loans to supplement her scholarship. Always busy, she ate takeout every night and developed a bit of a shopping habit—after all, school is so stressful. By the time she graduated, Rebecca’s student loans were dwarfed by a car loan and $15,000 in credit card debt. Even worse, her credit score had taken a hit after years of neglect.
During the same time, Evelyn started as a paralegal in a small law firm that handled bankruptcy cases. Startled by how quickly debt could get out of hand, she spent time familiarizing herself with her own spending habits and taking steps to invest in her future. By the time she left her job five years later, she had paid off all of her credit card debt and built up substantial savings. Then, using her excellent credit score, she qualified for a low-interest mortgage and bought an investment property.
Although Rebecca and Evelyn came from the same family and had access to the same education, their financial lives differ dramatically. In this case—and many—financial literacy was the difference between burdensome debt and the path to financial independence.
How to Improve Your Financial Literacy
Whether you’re just starting to build your finances, considering homeownership, or nearing retirement, there are a few important steps you can take to become more financially literate.
Familiarize Yourself with Your Finances
For many, the thought of reviewing bank accounts, credit card transactions, or retirement statements is somewhere in the realm of going to the dentist. It won’t be fun and nothing good can come from it. But, just as a dentist can catch cavities early, you’re more likely to avoid financial trouble by staying on top of your accounts. Start with these steps:
- Inventory your assets and liabilities. Go through each of your accounts and make a note of your debts (credit card balances, auto loans, mortgages, etc.) and your assets (cash savings, investment and retirement accounts, cars, and home equity).
- Identify how much income you bring in each month and how much you spend. You’ve probably heard it before: Spend less than you earn. This may be easier said than done, but you can start by making note of whether you’re spending more each month than you’re bringing in—a.k.a. living beyond your means.
- Look for fraudulent transactions. Part of developing financial literacy is taking ownership of your long term financial health and credit profile. Identifying fraudulent charges early makes it easier to challenge them, and helps you protect your credit score from bad actors and reporting errors.
- Make a list of all of your current credit cards and note the APR and rewards for each. Which card has the highest balance? Do you pay off each balance in full every month or are you accumulating interest? Are you making the most of rewards? Are there any cards you don’t use anymore?
This exercise can be hugely illuminating, especially if you’re struggling to make ends meet, are trying to pay down debt, or want to reach financial independence. How often you check your accounts can depend on your goals, but some financial gurus recommend developing a daily habit so you know exactly what to expect.
Stay On Top of Your Credit Score
Like it or not, you need a healthy credit profile for everything from getting a credit card to applying for a mortgage and even connecting to local utilities. If you’ve already requested and reviewed your credit report—great! If not, you can request a free copy from sites like Experian.
And, while requesting and reviewing your credit report is important, you also need to monitor your score consistently over time. Not only does this give you a comprehensive picture of your financial health and creditworthiness, it can protect you from the dangers of identity theft and reporting errors.
Many banks and credit card companies provide customers credit monitoring services. However, if you don’t already have access to these tools, consider signing up with a platform like Credit Karma, which lets you track changes to your credit score over time.
Set Your Financial Goals
Once you familiarize yourself with your current finances, start building your financial literacy by figuring out what you want your financial future to look like. This will also help you figure out what you need to do to reach those goals. Here are some common financial goals to get you started:
- Reduce spending or embark on a no-spend month
- Build an emergency fund that can cover a few months of expenses
- Pay off consumer debt, like auto loans and credit cards
- Start investing a certain percentage of your income each month
- Save for a down payment for a home or, if you’re already a homeowner, pay off your mortgage
Create a Budget—and Follow It!
Regardless of your goals and where you are in your financial journey, creating a budget is an easy way to transform your current finances into your ideal finances while expanding your financial literacy. The simplest way to create a budget is to make a ledger of your current monthly income. Then, list your variable and fixed expenses, making note of whether each is essential.
If you find you’re spending more than you’re bringing in—or if you’re not able to save or invest as much as you’d like—take a closer look at individual expenses. Based on your financial goals, determine how much you can afford to spend on certain expenses each month and adjust your spending habits accordingly.
You can use a simple spreadsheet to track your daily, weekly, or monthly spending. However, there are a number of helpful budgeting tools, like Mint, that can help you monitor accounts while offering extensive educational resources.
Reduce Your Debt
Between tracking your expenses and creating a budget, you may find that you have extra cash each month. Depending on your goals—and whether you already have an emergency fund—the next logical step may be to pay off your debt. Not only can paying off your debt improve your credit score, it will ultimately reduce your monthly expenses—leaving you more to save or invest.
If you want to pay down debt but don’t have much wiggle room in your budget, consider starting a side hustle to increase your cash flow.
Take Advantage of Resources & Support
Building financial literacy is all about learning about your finances and taking steps to make the most of your money. Luckily, there is no shortage of resources available to help you through this process. For example, you can take advantage of government tools like the Financial Literacy and Education Commission and MyMoney.gov.
You may also be able to access financial literacy tools and resources through your bank, credit card company, or a credit counseling agency such as the National Foundation for Credit Counseling (NFCC).
Plan For Your Future
Once you feel comfortable with the state of your day-to-day finances, start thinking about your future. How much do you already have in retirement accounts? Are you taking full advantage of your employer’s 401(k) match? Is there room in your budget to start investing more? How much will you actually need to retire?
If the thought of saving for retirement makes you nervous, start by contacting your employer’s 401(k) administrator. They’ll be able to tell you how your money is being invested and help you change your investment selections as necessary. And, if you typically have spare cash at the end of the month, consider setting up an individual brokerage account with an online investing platform.
Work With a Financial Advisor
Not everyone will want or even need to work with a financial advisor. In fact, most people don’t need to—or shouldn’t—spend the money to have someone else manage their finances. However, if you’re short on time, have room in your budget, and are facing a more unique or complex financial situation, it may be worth the investment.
Resources for further developing your financial literacy skills
- If you’re looking to become financially literate but you don’t have 4 years to get a degree in finance, Think Save Retire has a wealth of knowledge on the topic and you can find a master class in financial literacy here.
- Personal Capital is a money management platform that can get you up to speed on financial literacy in a hurry. With tools for budgeting, savings, investing, and retirement, you’ll be on the fast track to managing your money without a major time investment.
- If there was “required reading” for financial literacy, The Millionaire Next Door would be at the top of the list. You’ll learn practical tips for living within your means, building wealth, and the 7 common traits that are repeatedly found among the wealthy.
- As long as we’re talking about books, Your Money or Your Life is widely regarded as one of the best personal finance books ever written. With over a million copies sold, YMOYL is an excellent resource for changing your relationship with money and helping you to achieve your financial goals.
- One of the first steps on the road to financial independence is knowing your net worth, and this handy net worth calculator will do the work for you.
- This interview with self made multi-millionaire (and Tik Tok star) Jim Chuong covers everything from investing, the financial lessons that school didn’t teach you, and who you should be taking advice from when it comes to your finances.
Developing financial literacy doesn’t happen in one day. It takes time, energy, and a commitment to investigating your financial health and learning the skills needed to improve it. If you’re someone who isn’t comfortable talking—or even thinking—about money, start by taking inventory of your finances. Once you lift the curtain, you’ll likely feel more comfortable and ready to take the next steps toward financial literacy.