Studies show that people who are financially literate, financially outperform people who are not. If you know what you are doing, you will get better results. This makes sense but sometimes it is easier said than done.
What Is Financial Literacy?
Let’s talk about what we mean here. According to the Cambridge Dictionary, financial literacy by definition means “the ability to understand the basic principles of business and finance.” In layman’s terms, we are talking about being savvy about managing your money.
Basic financial literacy is the core component of being successful as an adult in this thing called life. The more basic principles you know, the better off you will be.
Before I educated myself on the basic financial literacy principles, I was intimidated by all the information out there. I was never great at math and the idea of learning about investments and numbers scared me.
However, the more I learned about money and finance, the more I realized that these principles were indeed basic. They are so basic that I have been able to teach my kids many of these principles so they are better equipped to be successful with their finances than I was.
Who Needs Financial Literacy Skills?
Without a doubt, everyone from children to adults needs to have these basic skills. It’s apparent that many in the banking and investment world want to intimidate us into believing that only they have the keys to understand how to manage our money.
The truth is, financial stability can be taught to not only grade-schoolers but also adults who have yet to learn these skills – and the information is free!
If you’re anything like me, you were not taught about basic money management in school. Instead, we focused on learning algebra and calculus without any real-world application. Fortunately, many states are finally realizing this and are pushing for education reform to include basic financial literacy classes to be included in high school.
Teaching financial skills should start in grade school – not well into adulthood.
What Is Basic Financial Literacy?
In the most basic of terms, there are really only three main components you need to improve your financial situation. Within these three components, the personal finance aspect takes over, meaning everyone will manage and spend their money differently.
However, in order to be successful, these three basic components need to be understood.
Budgeting is simply the process of understanding how much money is coming in each month and how much is going out each month. With this understanding comes direction and an ability to actually control your money, rather than your money controlling you.
Budgeting is the first step to become financially literate.
Saving involves the second step to becoming financially literate. It involves utilizing a budget to set aside a certain amount of money each month to save for future expenses or unknown situations.
Investing is usually the most misunderstood and scary part of financial literacy. Investing involves using your money to make money. In reality, investing is one of the easiest components of being financially literate.
Investing for retirement can be put on autopilot if you ignore all the investment advice and noise from people who are trying to profit off of you. Basic 401k, 457, Roth IRA knowledge can show you that even people with only a basic knowledge of investing can use their money to ensure a comfortable retirement.
9 Great Ways To Become Financially Literate
These 9 financial literacy concepts and steps will help you get started on your journey to understand money at a basic level. It’s time to get past all of the intimidation and to use this basic knowledge to your advantage.
1. Start With A Financial Literacy Month
You can’t develop good money habits if you have no idea what your current habits actually are. So if you are completely new to the world of financial literacy, you should start by tracking your spending for an entire month.
You should track every penny spent, as it’s spent, for a minimum of thirty days. This will give you an awareness of where the money goes.
The old fashioned way to do this is to buy a small notebook and pen and keep them on you at all times. As soon as you spend any money for any reason, write it down.
This time-tested method may still be the best method for many people. Some studies suggest that people remember things better when they record notes by hand. However, anecdotal evidence suggests this isn’t equally true for all individuals.
If you are particularly averse to doing it this way, it’s fine to find a digital format that works for you. Smartphones make it just as easy to do this digitally, and it usually is more efficient than doing it by hand.
You can use whatever app you wish for this project. It can be a note-taking app or a money management app of your choosing. I wrote a review of Undebt.it earlier that will help you track your money for free. If you need a free app, check out Undebt.it here.
Just remember to be very diligent about doing this consistently for the entire month. Like any other form of education, financial education involves doing your homework. This is an essential first step in getting your bearings in the financial landscape of your life. For many people, it permanently changes their relationship to money.
2. Study Up On Basic Financial Concepts
You can’t become financially literate without learning the lingo and what it means. Just like when you start a new course in high school or college, you should familiarize yourself with the basic vocabulary and enough background knowledge to actually understand what people mean when they use common financial terms.
There are simple ways to go about doing this, from Googling up introductory articles to starting your own personal dictionary. Here are a few quick and dirty definitions from Investopedia to get you started:
Student Debt: Student debt is money owed on a loan that was taken out to pay for educational expenses. If you are young and just now heading off to college, invest some quality time in understanding this subject.
The student loan crisis is out of control in the US and it is a crushing burden for far too many people. While managing debt is an important skill, avoiding unnecessary debt or bad debt is a much more valuable skill.
Financial Planning: This is about creating a comprehensive statement of … long-term objectives … and a detailed savings and investing strategy for achieving those objectives. In other words, setting financial goals and coming up with a plan for how to achieve them.
Interest Rates: Investopedia defines these as: the amount a lender charges for the use of assets expressed as a percentage of the principal. In reality, you need to understand interest both when you are borrowing money and when you are saving money. It’s not just something that applies to loans.
3. Educate Yourself About Debt
One of the most important and essential financial concepts you should seek to master is the difference between good debt and bad debt. Even if you never earn much money, avoiding bad debt is one of the most critical money habits you should seek to develop.
It can help protect you from a lifetime of financial misery.
Many Americans start off their financial life on the wrong foot fresh out of high school. This happens when they start college and promptly take out a student loan without really understanding the ramifications.
Whether or not to take on heavy student loans can be one of the most important financial decisions of your life. In far too many cases, this decision is made by people who are financially illiterate simply because they are young and inexperienced.
Even if you don’t begin life saddled with a mountain of student debt that you can’t really comfortably afford, you can still get in trouble with credit card debt and other consumer debt. This can negatively impact your financial welfare for your entire life.
Credit Cards Are Addictive
Kind of like drugs, charge card debt can be easy to get started and can feel really good in the short term. It can be all too tempting and seem like no real harm will come of it. Just remember that the “hangover” will be a doozy and won’t clear up in a day or so.
One big, bad spending decision can haunt you for years to come.
A mountain of consumer debt can be insidious. Charge cards offer low payments to make it painless to borrow, but the ugly truth is that this makes them very hard to pay off.
If you make only minimum payments, it can take many years to clear a relatively small amount of credit card debt. Meanwhile, you have paid through the nose in terms of interest for what little pleasure that fun time bought you.
4. Learn About Real Estate
Even if you have modest goals in life, you should learn some basics about real estate. For many Americans, the equity in their house accounts for more than half of their retirement nest egg. Thus, homeownership is often the difference between struggling financially for your entire life and enjoying a comfortable retirement.
However, the real estate market is more complicated than it once was, so it’s more important than ever to go into it with eyes wide open. It is likely to be one of the most important financial decisions you will make in your life.
You also want to be very financially literate before you embark on the homeownership journey. There is a lot riding on it and it’s not as easy as it used to be. Many people are sucked into loans they can’t afford simply because they trusted their lender.
Homeownership is one of the most important steps for financial health. And with a little bit of research, you can save tens of thousands of dollars. A basic understanding of interest rates, amortization, the risk involved in variable-rate versus fixed-rate mortgages will be a great place to start off on the right foot.
If you arm yourself with good information about both money and the local real estate market, there can be a huge payoff. You have to live somewhere and it probably won’t be free.
You could think of a mortgage as being like paying your rent to a bank instead of a landlord, but you do need to fully understand the risks and responsibilities involved as well.
5. Pursue Self Study
One of the best ways to become financially literate is to make self study a regular part of your life. These days, it’s easier than ever to do that. We have access to a wealth of information (for free) that our grandparents could not even imagine back in the day.
Find easy, simple ways to incorporate ongoing learning into your daily life in a manner that is comfortable for you. The best solution is one you will actually keep pursuing, so don’t be too judgy about how you like to do things. Just go with what works for you.
If you spend a large part of your day in a car, find radio programs you like, tapes or podcasts. If you prefer reading, seek out websites you like, magazines you enjoy or hit the library and check out good books on subjects you need to brush up on.
Set Yourself Up To Learn Each Day
Add some financial education to your daily routine in ways that are familiar. If you are active on Twitter, follow people who talk about financial subjects there. If Instagram is your thing, seek out your financial gurus via that channel. I also have several social media accounts if you need someone to follow. Check out the links on this page.
Just make it super easy to trip across fresh, relevant information on a regular basis. Over time, a little news here and a small article there really adds up.
Make it a habit to set learning goals. Pick a topic and try to fill your news feed or social media channels with things that are likely to be pertinent to your current learning goal.
Pick one per month and make that your focus. Have a financial literacy month devoted to learning all you can about saving money. Then have another month devoted to learning everything you can about managing debt.
Pretty soon, it will be second nature. This is the best way to make sure that all big decisions are made with an eye towards their impact on your future security and financial well being. It really shouldn’t be an afterthought or a thing you only think about occasionally.
6. Take A Class
Of course, self-study isn’t the only way to pursue a financial education. Formal study is a great way to get up to speed, especially on some of the more technical elements important to effective money management.
Many employers also have retirement and money management classes offered for free at your Human Resources Department. Check with your employer first to see how they can help you.
If you are interested in doing long-term financial planning, a class on a pertinent subject is a great idea. You could take a class about retirement planning or you could take a class introducing you to some of the basics of homeownership.
It’s also fine to take a class to help you get started. If you are feeling overwhelmed and don’t have any idea where to start, seek out a class that will introduce you to some of the basic financial concepts. Taking and passing a test can be a great way to make sure you feel confident that you really understand the material.
Free Is One Of My Favorite Words
You may be able to get free classes from local organizations. Your local library is a great place to begin looking for information about local programs of this sort.
If you can afford to spend a bit of money, you can check out your local community college. You might be surprised by what they have to offer that could be pertinent to your needs.
If taking a class in person doesn’t fit into your busy schedule, look for online classes. Just be careful about cybersecurity and potential scams. The internet can be an annoyingly easy place to get scammed if you don’t have some basic computer literacy down pat.
7. Talk With A Professional
There are myriad professionals that can help you improve your financial literacy. For some professions, this is very much a part of their job.
Life insurance can be an important part of estate planning. If there is anyone financially dependent upon you, it would be negligent to not talk to a professional about some means to provide for them should you suddenly become disabled or die unexpectedly. Check out my related article on term life insurance.
If you are comfortably well off, you should speak with an actual financial planner. They can help you layout goals and come up with a plan of attack on how to achieve them.
You May Need Professional Advice
Retirement planners are a subset of financial planners. If you don’t wish to work until the day you die, it may take some planning to make sure you have money to live on. It’s very problematic if you outlive your money.
If you expect your money to outlive you, then you should speak with an estate planner. Having more money than you need may be a good problem to have, but it can still be a genuine problem.
Inheritance taxes and other thorny legal matters can make wealth a huge headache. The right professional can help ease your pain.
Of course, maybe you have the opposite problem. Maybe you are already in financial trouble, mired in debt and not sure what to do. Before you panic, slow down and let’s make a plan to change your financial habits. I wrote an article called The Debt Payoff Playbook that can get you started.
8. Learn About Savings And Investments
Many people consider this to be one of the most advanced and technical financial concepts. But the reality is that if you ever going to stop living hand-to-mouth and putting every emergency on a credit card, you need to learn about this stuff too.
It’s also the only real hope you have of ever being wealthy. There used to be an old commercial for a financial magazine that said, “How money becomes wealth.” Just having a good income doesn’t make you rich.
Every year, some well-paid celebrity making big bucks declares bankruptcy. Some people who are in the business of educating people about managing their finances keep a lookout for such news so they can use a current name as one of their examples.
Investing Is Easier Than You Think
You have to learn the basics about savings and investments if you ever want to own a home or save for retirement. You may not reach any of your long-term financial goals without learning how to set aside money regularly and how to make it grow.
Savings is a deceptive term. Many people think of savings accounts when they hear that term, but there is no clear divide between savings and investments.
Conservative investment instruments, like bonds, are usually called savings. More aggressive, growth-oriented instruments, like stocks, are usually called investments.
The reality is if you have a sizable nest egg, your portfolio will have some of each. This is part of why you so often hear the two words paired together like a single term: “savings and investments.”
There is no clear, bright line between the two. They go together like peas and carrots.
9. Learn About Retirement Planning
If you expect to live a good long time, you should be thinking about retirement. This is true even if you are in your twenties.
The sooner you can start socking away the dough, the easier it will be to build a retirement nest egg. This is true due to the power of compound interest. Even Einstein said, “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
In layman’s terms, this means your money earns money which then earns even more money. Over a long period of time, the interest can really add up to shockingly large sums.
Contact Your Human Resources About Your Retirement Account Options
Additionally, many retirement instruments only allow you to put away so much per year. There can also be “free” money available in the form of matching funds from your employer for contributing to your retirement fund.
No, they won’t give you extra later if you don’t put it away now. You will be missing out on substantial amounts of money if you don’t start early and contribute regularly, taking advantage of all options.
Of course, over time, inflation takes its toll as well. This is part of why you should start early with putting away money for retirement. That projected figure may sound like a whole lot of money now, but you will likely need every dime of it just to scrape by.
The future tends to be more expensive than the present.
You should start saving for retirement even if you don’t have six months of income put away as emergency savings.
Wrapping It All Up
You can never be too financially literate and you can’t start too young on trying to understand money. People who get some basics on the subject from their parents have a big head start in life than those who don’t.
If you didn’t get that education starting in early childhood by good examples set by savvy parents, the sooner you start educating yourself, the better. Otherwise, you will be playing catch up your entire life and you will find it is never enough.
If you don’t educate yourself, you may watch friends and relatives enjoy the good life while life seems to pass you by. You may envy the people around you able to retire at all while you keep working just to scrape by.
Of course, a good income can make a big difference. Pursuing the right career can make it much easier to achieve the good life. Plus, luck is always a factor.
But it’s not all luck. A lot of it is about educating yourself, setting goals and pursuing them consistently over a lifetime.