What is Financial Literacy?
You need to read and write to hold a decent job, order from a restaurant menu, or take the test for a driver's license. Basic literacy skills are taught in school. Math is, too. They are essential tools to survive and lead a meaningful life.
When you enter the working world and first live on your own, managing your money is your responsibility. But how are you supposed to know what to do, when schools don't teach financial literacy? Don't they realize how that without financial literacy it is easy to make bad money decisions that have serious negative consequences?
No need to panic if no one taught you, yet. Financial literacy is a skill that you can acquire, just like reading, writing, and math. It is a combination of knowledge and common sense. Don't get bogged down with jargon. Don't feel you need to be an economist, banker, or professor to master financial literacy basics.
Financial literacy, at its core, is understanding how to manage your money. It includes your spending, savings, and borrowing habits, how you deal with debt, and your short and long-term financial planning.
If you focus on the basics, you will be able to improve your financial health.
Making Wise Financial Choices
Here is a simple example that illustrates some important financial literacy principles:
Susan and Tom got married and came back from a blissful honeymoon (and are still dreaming about Hawaii). They had an awesome, big wedding and a spectacular trip.
It wasn't until after they got home and the bills started coming that they paid close attention to their credit card statements. Oops! They ran up big balances and were not sure how they were going to pay off the debt. Tom asked Susan, how much do we owe? How long is it going to take to pay it off? Susan explained to Tom that they needed to make minimum payments, but the interest rate looked very high. They looked at each other and laughed. Even, if we started on the wrong foot, we know that we can get back on track by taking the right steps.
Lessons for Susan and Tom:
Spending money properly: Budgeting is the first element of financial literacy. Do you know how much you make and how much you spend? Use any of a number of budgeting apps to track your monthly expenses. If you are planning a big wedding, or other occasions do you want to run up a lot of debt like Tom and Susan? Were they wise shoppers? Did the look for the best deals? Did they decide to do without something they wanted because the costs were too high?
Borrow money wisely. Susan and Tom ran up big credit card bills. They were willing wanted to spend more money than they had available for a big, extravagant, once-in-a-lifetime wedding and fancy honeymoon. Separate from the wisdom of that decision, did Tom and Susan shop around for a loan? Was a credit card the best option? Did they find one with the lowest rate possible? Did they know how to compare loan terms and interest rate APRs?
Deal with Debt: Dealing with debt is one of the hardest parts of finances. There are a lot of households struggling to pay their bills, and running up debt. There are good reasons to take on debt and bad. There are also different ways of paying off debt. Some people can deal with their debt with small adjustments to their finances, and others need to figure out ways to handle debt collectors and lawsuits.
Build Savings: To be financially literate you need to understand how to save money. Savings allows you to make large purchases, deal with an emergency, and prepare for the future through retirement and investment accounts. Did Susan and Tom consider that saving money for the wedding and limiting spending to what they saved would leave them in a much stronger financial position? Prioritizing your spending and build your savings accounts.
Financial Planning: Knowing the types of tools you have to plan for the future is an essential part of managing your finances. Protecting yourself against unforeseen events is critical. House insurance, car insurance, and health insurance are all important parts of your financial planning. It should come as no surprise that people who understand how to plan their finances are more financially healthy.
How to Improve Your Financial Literacy?
There are a number of ways you can learn to become financially literate. You can read about the topic; learn from your or your friends' and family's personal experience; through trial and error; from personal finance professionals' advice.
Here are four steps to take:
- Take the Bills.com Financial Health Survey. Measure where you stand today by receiving a score in each of the critical financial building blocks. Focus on areas that need the most improvement.
- Take advantage of a wide range of free tools that help you understand your situation or find a solution for a particular financial problem. For example, do you need to know how to pay off your debt, then check out the Debt Payoff Calculator.
- Read articles about the personal finance subjects that interest you.
- Send us your comments and questions. Either login and post your question or comment, or use the Chat feature, and we will get back in touch with you.