Financial literacy just means being smart/responsible with your money. In the same way we are “literate” and can read – in this instance if we are financially literate – we know and understand our finances.
Financial literacy is a practice and a journey. Just like with reading, the more you do it the better you become. You learn to read more complex content and your skills improve – the same is true with money. This also means that it’s learned and if you aren’t in a good place with your finances – you can be! Likewise, if you’re gliding smoothly with your finances – now is your chance to be better or perfect your skills.
Let’s look at the five basic steps that can lead to financial literacy:
- Understand your current financial status. This can’t be overstated. Because of automation and paperless statements, many people don’t even keep up with their paychecks. It’s a lot harder these days to know your average paycheck after insurance and taxes. It’s also easier than ever to live above your means by deferring your payments or charging a credit card. Print out statements, watch your bank activity, and learn the patterns of what you get paid and how you spend it. Without this understanding, you can’t be effective.
- Save. Once you take a look at your current financial status – you’ll realize (like most of us) that you can stand some change. The best change to make first is to begin saving or saving more. This does not have to be 401K or big accounts. Start small. Try a dollar a day, or a dollar a week and keep up all year. The discipline of saving has little to do with how much money you make and much more to do with how willing you are to prioritize it. There is also no standard. If you can’t save a lot – that’s okay! You’re still doing it!
- Budget. Now that you’re willing to save, you can budget. Gather your bills and monthly payments so you can record actual amounts for your budget. Understand if you don’t budget at all, the first month is just a projection that you’ll try to match. However, it will take adjusting. Especially, as you begin to watch your accounts, cut unnecessary spending, and think more frugally. Budgeting may be something you refresh every month, it may be something you outline and put on the fridge and stick to for the year, it may be mental list. Everyone is different and everyone benefits from budgeting.
- Make adjustments. Budgets can be uncomfortable. They demand financial change. This can be hard to understand as most of us have inherited the money mind of our parents or guardians, but budgets can make us question whether what worked for them will work for us. If debt is burdening you – start paying it off, begin to only pay cash, or stick to necessities. Ask for help
- Practice good credit card habits. This one could be its own post. Using credit cards is a necessary evil if you want to buy a home or newer car. Few people can pay out of pockets for these things, and you are required to have credit to be given loans for either one of those purchases. Be consistent with paying monthly balances, only purchase needs, only purchase what you could easily match in cash.
