Pop the champagne because April is financial literacy month! Okay, maybe you aren’t quite that excited, but maybe you should be. Financial literacy is powerful. In finance, what you know can help you become very wealthy. Conversely, what you don’t know can hurt you badly. That’s why we’ll be posting about financial literacy all April, so you can start moving forward on your financial goals and avoid costly mistakes.
What is financial literacy?
Financial literacy is a base of knowledge you can use to make smart decisions with your money. Without it, you are susceptible to a host of problems, like unsustainable debt and poor spending habits. Unchecked, these problems can snowball until you cannot meet simple financial obligations like utility bills. They can impact long-term goals and even force you to work well beyond retirement age.
But strong financial literacy can erase those problems, letting you enjoy your income and have extra for things like vacations. It can even set you up for a long retirement.
Let’s look at what you need to know to become a financial dynamo.
The foundations of financial literacy
This is the root of all good personal finance. Increasing your earning power through education (both formal and informal) will give you more leverage for the next foundation.
Saving and Investing
There’s a lot to unpack here, too much for this post. But suffice it to say you must learn to create and follow a monthly budget to save. And in that budget, pay yourself first, even if it is a small amount.
Once you are saving, you can compound that money through investing. If you haven’t started already, go in simply and slowly. Add to a 401K if your employer offers one. If not, open an Individual Retirement Account. These are just a few ideas but take the time to read and read some more on this subject. It will pay off for you in the long run.
Get the insurance you need for unexpected emergencies. Of course, insurance doesn’t cover every unforeseen occurrence, such as a job loss. For those things, it is good to have an emergency fund of three to six months of salary in the bank.
This can be one of the most challenging areas to work on because money is behavioral. How you were brought up to think about money and how you handle emotions can have a big impact on how you spend.
Later this month, we’ll suggest some books that address these fundamental issues so you can be more effective in implementing your financial knowledge.
“Neither a borrower nor a lender be.”
That’s an old adage that is much easier said than done. At some point, you’ll probably have to borrow money for a large purchase, such as a vehicle or a house.
You must understand the basics of interest to be effective in this area. You must also keep that budget we mentioned earlier so you know how much you can borrow without getting into trouble.
Finally, only borrow on things with a good investment return. For example, a home loan can be good if the house you buy goes up in value over time and you get it at an affordable price.
The Bottom Line
Your level of financial literacy can make or break you. It’s really that simple.
So, understand that financial literacy is a lifelong journey. Keep learning all you can about the five foundations in this post, and watch the rewards roll in!