The importance of financial literacyMonday 12 October 2020 | Reading Time: 4 minutes
Financial literacy is a major concern for many. So much so, there's an entire month, April, designated as National Financial Literacy Month. Despite this, the unfortunate truth is that financial literacy is often something many Americans struggle with. An amazing 44% of citizens don't currently have enough money to cover the cost of a $400 emergency. Just as alarming, approximately one-third of Americans have nothing saved for retirement.1
Just like many of these people, you may struggle with becoming financially literate. Ask yourself these questions:
- Do you know how to create a monthly budget?
- Are you actively trying to reduce your debts?
- Do you have an emergency fund?
- Do you know what insurance options are available that can help protect your finances and investments?
- Do you understand how investments work?
- Do you have a retirement savings plan?
If you answered “no” to any of these questions, don’t worry. You can change that. You can become financially literate so you can confidently manage budgets, debt investments, retirement, emergencies, and savings. Here’s what you need to know.
Are you spending more than you’re bringing in? If you’re struggling with finances and living paycheck to paycheck, part of the problem could be simple math. To achieve financial literacy, you must first start by assessing your finances and understanding the value of a budget. A budget will help get you on track with regards to paying your expenses, eliminating debt, and saving for goals. In other words, it’s a tool for money management. With a budget, you’ll be able to track spending and adjust it as you go to ensure you aren’t spending beyond your means. Knowing where your money is going and directing it where it needs to go is a big, initial step toward financial literacy.
Making a plan to save enough money for your nest egg, being familiar with types of accounts can aid in your goals, and knowing what expenses to look out for are all financially literate concepts you should understand when planning for retirement. Many Americans don’t have a realistic idea of how much money they’ll need to cover expenses and live comfortably once they leave the working world. Taking the time to determine a target amount to save is a good first step that will help you figure out how much you need to save every month. As a financial literate you’ll be able to calculate how much you’ll need to live the lifestyle you want when you leave the workforce.
Unexpected events can have a dramatic and lasting effect on your financial future if you aren’t prepared. Unfortunately, more than a third of Americans don’t have the means to cover an emergency like the effects of the current pandemic. When you’re financially literate you’ll understand how crucial an emergency fund is to prevent debt from accumulating when unexpected expenses arise. Creating an emergency fund that includes three to six months of expenses will help see you through life’s many curveballs.
To be financially literate, you need to be able to understand how loans work and recognize the value in finding the lowest interest rates when reviewing terms. Financial literacy gives you options. It will help you discover the best methods to get debt-free with solutions like transferring your credit balance to lower interest card or debt consolidation. Most of us owe something, whether it’s a mortgage on a house, credit card bills, auto loans, or college loans. Paying off your balances each month helps prevent interest charges and positively affects your credit score, which gives lenders a fast, objective measurement of your credit risk. Good credit can help you secure loans faster, give you more credit, and lower your credit rates overall. Be sure to check your credit score often, as well as your credit card balances and your bank accounts, to stay on top of your finances.
Financial literacy tools
If you’re looking to become financially literate, there are a variety of tools and resources that can help you. A budgeting app is also a good way to get started. It will keep track of your spending, create budgets, and help get your finances under control. Many applications are designed for general personal budgeting, but each app may offer you something else, such as the ability to track your bills and alerts when you are close to over-spending.
Look for local educational programs on financial topics offered through credit counseling agencies, financial websites, or government courses, such as the FDIC's Money Smart financial education program.
If you feel you need some help or guidance, don’t be afraid to seek it out. Consider working with a financial professional, who can assist with planning, savings, retirement, and paying down your debts. To find the right agent who fits your needs, submit your information through our find an agent page.
- Source: Forbes, 2018