In a nutshell, financial literacy means understanding and applying money management skills such as budgeting, saving, and investing in our daily lives.
If you’ve been living from paycheck to paycheck, it might be helpful to take a step back and look at your finances through a new lens. Here are a few tips on how to improve financial literacy and have a more financially stable life.
How Financial Literacy Helps You
Unfortunately, financial literacy is not taught to most people in school. However, it’s essential to take the initiative to learn more about managing your finances, as it will have a significant impact on your life.
Change How You View Money
Financial literacy helps you to understand the true value of money. Many people view money as something that simply allows them to buy more stuff. However, it’s really a tool that can help you reach your goals—whether that’s budgeting for monthly bills, saving for your children’s college education, or some other worthy endeavor.
Approach Debt with Purpose
When you’re financially literate, you’re also less likely to acquire debt for items you don’t need. And if you do borrow money for necessities like buying a home or vehicle, you’ll know how much debt you can reasonably afford to take on, and you’ll have a sound plan for repayment.
Get Prepared for Emergencies
Financial literacy also helps you to be more prepared for the unexpected. When a tragedy, such as an auto accident or sudden death in the family occurs, you can weather the storm by tapping into the emergency fund you created.
How to Improve Financial Literacy in 5 Steps
Changing your entire approach to finances can seem like a tall order—and it’s something you can spend years improving. But we’ve narrowed it down to five steps for improving financial literacy to give you a straightforward, manageable way to get started.
Step 1. Track Your Finances
The first step to taking control of your finances is to check how money moves through your household (and where it goes). Start by assessing how much money you earn versus the amount you spend between pay periods. Figuring this out will give you an idea of how much money you have to work with. It can also warn you if you’re actually spending more than you earn.
Some of the basics you can monitor include:
- Income: How much you are earning from your job.
- Bank statements: How much gets deposited and withdrawn each month.
- Utility bills: How much you pay for water, electricity, heating, etc.
- Loans: How much you owe, and when you need to pay the debt.
- Credit card statements: The amount of your total balance and monthly fees. What do you use your card for?
- Living expenses: How much goes into food, groceries, transportation, etc.
Step 2. Set Your Goals
Working toward a goal gives you a reason to save and watch your money carefully. However, your goals can have different priority levels. You could list what you want to accomplish, categorizing each item into short-term and long-term goals.
For example, a short-term goal could be saving up to purchase a $40,000 car within two years. Meanwhile, a long-term one might have you set aside $1 million before you turn 60. Sorting them out will help you on the next step—budgeting your money.
Step 3. Start Budgeting
Once you’ve figured out your goals and how much money you’re working with each month, you can build a budget around it. In a budget, you’ll determine:
- How much goes to your bills, groceries, and other living expenses
- The amount you can save for your goals
- How much you can use for non-essential expenses (e.g., going on a family vacation)
It’ll also let you know if your goals’ target dates aren’t realistic. For instance, your goal of buying that $40,000 car within two years might not be doable with your current budget, even if you allocate less for other expenses. This can help you decide whether you should adjust your timetable, look for ways to increase your income, or set aside that goal altogether.
Besides saving for goals, you might want to consider including an emergency fund in your budget. It’ll help pay for your expenses in case unexpected problems arise, like hospitalizations, major car repairs, or losing a job.
The rule of thumb is to save enough money to cover between 3-6 months’ worth of expenses. Ideally, this would give you ample time to search for another income source or recover the funds lost.
Step 4. Live Within Your Financial Means
It can be tempting to buy the latest iPhone model or eat out at an expensive restaurant, but do you actually have the money for it? Unless you can curb it in time, impulse buying can end up eating away at your budget and setting your financial goals back.
You’ll want to make sure that you’re spending less than what you earn. This will help you avoid going into deep debt from having to constantly borrow money to pay the bills. This might mean making a few sacrifices in the present, like settling for your current phone or not buying that designer jacket.
But if you really want to buy something, why not turn it into one of your goals and include it in your budget?
Step 5. Use Financial Education Resources
Though many Texans struggle with their finances, Texas is slowly solving this as one of the states now teaching financial education to students. However, the federal government also has online resources to help everyone learn more about how to improve financial literacy. For instance, the Financial Literacy and Education Commission has MyMoney.gov. This website can show you the ropes of different skills like borrowing and investing.
You could also check out this list provided by the Texas Office of Consumer Credit Commissioner. It has financial literacy guides from both state and federal resources.
Financial Literacy Is Worth It
Becoming financially literate is the key to building a secure future for you and your loved ones. You must stay committed to learning more than you know now. This way, you’ll always be flexible and able to apply your new lessons if things don’t go according to plan.