You are not alone if you lack financial literacy skills and confidence, but it is never too late to learn. Understanding these core monetary concepts will provide you with the knowledge and confidence to make smart money management decisions and position yourself for long-term financial stability.
Calculate Monthly Income
Knowing how much money you receive each month is a critical first step in becoming financially literate. Add up monthly earnings from salary or wages, tips and bonuses after taxes. Be sure to include money received from other sources, like investment or rental income.
Establish a Budget
Allocate spending of your monthly income in a budget. Websites and apps are available to help prepare a budget, or an excel spreadsheet works well too. Identify fixed expenses, such as rent or mortgage payment, utilities, transportation, insurance and other bills or loans. Estimate discretionary spending for food, travel, shopping and dining out. Include a savings allotment. The most important aspect of creating a budget is setting up a realistic plan and sticking to it.
It may seem obvious, but you need to know when bills will arrive and when they are due. Consider setting up automatic debits or using a bill-paying app to ensure payments are made on time.
Protect Your Assets
An often-overlooked part of financial literacy, insurance protects money-building efforts and ensures that you will not face hardships from an accident or unfortunate event. Typical insurance types include auto, homeowners/renters, health, life, long-term care, disability and identify theft. Circumstances can change, so it is important to reevaluate insurance needs frequently. You can often save money by comparison shopping or bundling types. The financially savvy individual knows that with a little legwork it is possible to find cheap car insurance that adequately covers your needs.
Build an Emergency Fund
It is important to set aside money for unexpected events. Most financial experts recommend having enough money to cover three to six months of living expenses. This fund can cover short-term emergencies, such as needing a new appliance or a car repair. It also protects in the event of a job layoff, long-term illness, natural disaster or unplanned travel expenses.
In addition to creating an emergency fund, it is also good practice to save for other major life events. Set a goal and decide how much you plan to contribute to your savings each month. Once it is part of your monthly expenditures, you will be surprised how quickly a nice nest egg develops. This will be handy when it comes time to buy a house, start a family or take that once-in-a-lifetime trip.
Manage Debt and Credit
It is easy to get into trouble with excessive debt or bad credit, but financial literacy can keep this from happening. Sticking to a budget and paying bills on time helps keep debt and credit in check. If you have excessive debt, pay down higher interest rate loans first. Other debt-reduction strategies include consolidating loans and renegotiating terms.
Knowing how to be responsible with credit cards is another key component of financial literacy. Paying off credit charges each month is an ideal course of action, but if that does not fit with your budget then look for cards with lower APR, no fees or rewards programs. Establishing a good credit score can result in lower mortgage and other loan interest rates. Monitor credit scores regularly. Many major credit bureaus allow a free report annually. Be aware that too many credit inquiries can lower your rating.
A key concept of financial literacy is knowing how investing helps grow assets and prepare for future monetary comfort. Basic knowledge about the various types of investments available and such concepts as compound interest, risk-reward tradeoffs and diversification can help improve savings success. Take an early approach to retirement by maximizing contributions to an employer 401(k) or IRA. Investing is complex so consult a financial professional if this aspect of your fiscal situation is overwhelming.
Understanding and executing these core financial literacy concepts is key to sound personal money management and fiscal stability.