Amid a challenging economy, you've probably heard numerous news reports discussing "financial literacy". But, if you're like most Americans, you may be left wondering what financial literacy is. To empower our readers, we've put together a simple definition and compiled a list of five essential components of being financially literate.
What do we mean by "financially literacy"?
Simply put, financial literacy refers to your ability to apply your knowledge and skills towards intelligently managing money and resources to ensure financial well-being throughout your lifetime.
While that concept may be simple in theory, there are many moving parts to consider. That's why it's wise to have a checklist to refer to as a benchmark for your progress and overall financial health. Regular evaluation is key to ensuring your strategy is working in your favor.
Component 1: Earning
The first component of financial literacy is a solid understanding of your earnings. Although many people know how much they earn before tax deductions, they don't know how to calculate their net monthly income. Don't worry - you don't have to be a math wiz to do this. Plenty of online tools make it simple to determine your net income.
Component 2: Spending
It's easy to develop a pattern of spending without thinking, but planning and sticking to a budget is a huge part of financial literacy. Knowing exactly where your money is going and how it's being spent prevents you from going into debt, forgetting to pay certain bills, or even making duplicate payments. Not sure where to begin? Consider chatting with a financial planner to create a budget.
Component 3: Saving
Each month, a portion of your net income should go toward putting money aside for the future. Even a small amount will grow nicely over time when managed properly. Consider both long-term and short-term savings strategies. While a long-term savings fund will support retirement, short-term savings can be used on a rainy day to ensure you don't go into debt over an unplanned emergency.
Component 4: Borrowing
Credit cards can be a big asset when you do your research. Find a card without hidden or annual fees, and that offers low interest rates. When spending with a credit card, start small. Never buy something you can't afford, and stay on top of monthly payments. In doing so, you'll quickly improve your standing with credit bureaus. When this happens, you can expect better rates on major purchases and improved credit card rewards.
Component 5: Protecting
Protection and security should always be a part of your financial literacy strategy. Be cautious with any personal information you share online, change your passwords regularly, and look out for financial scams. Avoid clicking on links that have supposedly come from your financial institution, lock your credit cards when you aren't using them, and develop personal relationships with your advisors, so you know who you can trust.
It's Never Too Late
It's never too late to assess your personal level of financial literacy and make improvements. Feeling overwhelmed? You don't have to go it alone. At Rally, we believe all Americans should have access to affordable financial advice. Our experts make it easy to create budgets, reach savings goals, and build credit. Reach out to our team to learn more about planning for your future today.