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What Are the Main Components of Financial Literacy?


What Are the Main Components of Financial Literacy

Managing your finances is a skill, but unfortunately, it’s one that not everyone learns in school. Anyone looking to better their finances likely feels overwhelmed by trying to learn everything at once. Terms like financial advisors, investing, bills, interest rates, and more can make personal finance seem daunting. So what does it take to have full financial literacy?

The good news is you don’t have to know everything there is to know about finance. To get started, simply focus on the main components of financial literacy. Once you master these areas of finance, you’ll be well on your way to betting your money. Here are the main components of financial literacy that you should learn about.

Budgeting Basics

First things first – you can’t be financially literate without having a solid budgeting strategy.

Budgeting is like fuel for your finances. You can’t make any additional financial progress without having a budget.

If you don’t have a budget, you’re not alone! In fact, 33 percent of Americans don’t budget. It’s never too late to start.

To start, list out all of your expenses. Where does your money actually go? List out your bills, and then calculate how much you actually spend in each area of your life. For instance, how much do you spend per month on groceries? What about eating out? These expenses may be surprising, but it’s important to start where you are!

Next, write down your income. If you have a regular paycheck, this should be pretty easy to calculate. Be sure to add in any additional side income you may have.

Now that you have a snapshot of where your money is actually going, it’s time to construct a budget. There are a ton of free budgeting apps to help you get started, or you can simply use pen and paper or an Excel document.

In your budget, write down every area of spending. Don’t forget to add any debt repayment or savings goals you have. Then, write down a realistic goal for each area of spending. This is a vital part – it’s important to push yourself, but also to be realistic about how much you can spend.

Most importantly – keep tracking your spending throughout the month! Even if you overspend in a certain budgeting area, it’s so vital to keep tracking. Remember, the budget is the start of your financial journey. It doesn’t have to be perfect – you just have to start.

How to Manage Your Bank Accounts

Now that you have your budget straightened out, it’s time to focus on how you manage your bank accounts.

This might seem silly, but what’s your system to make sure all of your bills are paid on time? How do you put money into a savings account and ensure you don’t spend it on something else? Are you earning decent interest on your savings accounts, and is your bank accessible?

If you’re not sure where to start, begin with your bank in general. Are you happy with the level of service you receive? If not, it’s time to switch.

Now that you have a bank you like, set your bills up on autopay. This ensures you are never late on a bill, which saves you money in fees and interest. And of course, it saves you energy and time when you have your bills automated!

Making Saving a Top Priority

Everyone knows saving money is important, but a sign of true financial literacy is understanding just how important saving money is.

You can start by saving for a big-ticket item you really want. Maybe it’s a vacation, a new pair of shoes, or a house. Once you start making progress towards your goals, you’ll be building your saving muscle. And once you achieve your goal, you’ll fully understand what you can achieve when you make saving money a priority in your life.

Understanding How to Use Credit and Debt Safely

DO you know how to effectively and responsibly use debt?

While it may be tempting to apply for every credit card offer that comes in the mail, this can quickly lead to both a debt issue and a credit issue. If you don’t effectively use debt, your credit score will show it.

If you choose to utilize debt or credit cards, know what you are getting into. Make sure you are meeting all of your monthly payments and not borrowing more than you can pay. Responsible management of debt will gradually increase your credit score, which can help you secure lower interest rates in the future.

Financial Security

In today’s digital world, identity theft is, unfortunately, more common than ever. Just think about it – how many places on the internet have you entered in your credit card information? What about personal information, such as your bank account numbers, date of birth, or social security number?

While most online shops go to great lengths to protect your personal information, nothing is ever guaranteed. Exercise caution, and only enter in private information on sites you trust. Make sure you are using strong passwords, and check your credit report regularly to ensure no fraudulent activity has happened.

Utilizing the Power of Interest

And finally, the last component of financial literacy is understanding (and utilizing) the power of interest.

Interest can work either for you or against you. If you have debt, interest is accumulating on what you owe. This means you end up paying more than what you borrowed due to interest. Some forms of debt, like credit cards, have incredibly high-interest rates, so they definitely work against you.

On the other hand, when it comes to saving money, interest is your best friend! Socking money away in a high-interest savings account, a retirement fund, or any mutual funds will build your savings over time due to interest. While interest rates may vary, if you invest in any stocks, you can typically expect anywhere from a 6 to 8 percent rate of return on your initial investments over the lifetime of your funds. That means, your money is making you money – and that’s a pretty sweet spot to be in!

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