Ever feel like you don’t have a ton of know-how of money management? You’re not alone. Personal finance has become increasingly complex. Student loans, credit scores, retirement accounts, and investment vehicles — there is a lot to take in.
Only half of adults in the US are considered financially literate. This is a huge gap, and to make sure your financial future doesn’t slip through the cracks, you need to take action. This is where financial literacy steps in.
Keep reading to know what financial literacy is, why it matters, the main components, and ways to become more financially literate:
What is Financial Literacy?
Financial literacy is about building a smart relationship with money. It is a set of knowledge and skills needed to handle money wisely. This includes household budgeting, managing debt, evaluating financial products, investments, and more. Financial literacy also covers short- and long-term financial goals and how an individual reaches them.
There is a range of free and paid resources, such as financial literacy courses, personal finance classes, and finance podcasts, that prepare adults to handle their financial lives. Consider looking into reliable course providers like Intuit.
Fundamental Components of Financial Literacy
Before moving forward, let’s look at the main components of financial literacy:
Budgeting
Budgeting is about understanding where your money is going every month. It involves determining your total income and allocating a certain percentage of it to each necessary expense, such as housing, education, utilities, child care, and transport. Budgeting also means balancing your wants and needs, ensuring both financial security and prosperity.
Investing
A financially literate adult understands the ins and outs of investing. This includes knowledge of different asset classes, price levels, risk mitigation strategies, and diversification.
Debt repayment
Almost every US adult borrows money at some point in their lives. Financial literacy helps individuals implement a strategic debt repayment strategy. This could mean paying off high-interest loans first or consolidating all loans into one. The choice depends on your financial circumstances and long-term goals.
Taxation
Financial literacy also teaches different forms of taxation and how they impact an individual’s net income.
Knowledge of financial products
Financial products, such as mortgages, student loans, health insurance, and self-directed investment accounts, have become a critical part of life. Understanding their implications and benefits is also part of financial literacy.
Why It Matters
Being financially illiterate in this day and age leads to a range of pitfalls. Many people end up accumulating unsustainable debts with high interest rates. Many have a poor credit score due to impulsive spending and a lack of planning. In the end, bankruptcy and house foreclosure become their reality.
According to a survey, more than 78% of Americans live paycheck to paycheck. Moreover, student loan debt is about $1.5 trillion for more than 44 million Americans. Such statistics highlight why financial literacy is important.
Financial literacy prepares adults for uncertain economic circumstances, such as rising inflation. The effective management of debt and cash flow while keeping an eye on your long-term financial goals can reduce stress.
