What is Financial Literacy? A complete manual for beginners

Making smart financial decisions is crucial, but it’s not everyone’s cup of tea. It helps in achieving security of financial balance which then plays a role in making smart decisions. But if you want stable finances, you must have the proper knowledge. Mainly, there are two parts of financial literacy:

  • Know how to manage your money
  • Managing Money (Actually)

If we do extensive research, there are many ways and principles of money management. But it would be better if you have financial knowledge to know the best steps you can include in your daily life. Before taking any action, it is essential to start from scratch and understand the definition:

What is Financial Literacy? A description from the experts’ point of view:

Simply put, financial literacy is the ability to understand terms related to money. You use your knowledge and skills to gain financial stability and well-being. The main objective of all this practice is to learn the means that will help you to use monetary resources wisely. According to the former chairman of the US Federal Reserve:

“Financial illiteracy is the number one problem of today’s generation.”

If you know the ways of money management, it can change the course of life. There are many branches of financial management that you need to understand. For example, here we list a few to give beginners an idea:

Other than that, it teaches you about debt management, applying savings techniques, and calculating compound interest. This way, you can gain long-term financial stability while planning for the financial future.

Importance of Financial Literacy:

The goal of financial literacy is to track expenses, debts, and investments. We can take the example of organizations that use online pay stub makers to record costs that will help later in making calculated decisions. If you use knowledge effectively, it will help you in the following ways:

  • It helps to develop better spending habits
  • You learn the importance of savings accounts
  • It helps to make better and more effective financial decisions
  • Moreover, money knowledge makes life easy and you have to struggle a lot

According to the United States Departments of State, “the financial literacy of American citizens is steadily declining.” Making smart financial decisions is more important than anything; that is why it is high time to develop these skills.

What are the steps to manage personal finances? Acquire financial literacy:

You cannot make good decisions throughout your life without financial knowledge. This means that you need money knowledge even if you are self-employed or following a Lifestyle at work. So here are some steps that will lead you in the right direction.

Understand the basics of budgeting:

This is the most crucial step that you should not skip while learning and applying financial literacy. However, creating a budget in this modern age is not difficult. How many apps and websites have made it all easy. Despite the apps, there are specific tips and tricks you need to follow to keep your finances on track. So, while making a successful budget, remember to focus on the following point:

  • Follow a monthly plan.
  • Discover ways to reduce your monthly expenses and bills
  • Learn to manage your debts
  • Make a chart of your family’s needs
  • Differentiate between short, long and medium term loans

Budgeting helps analyze spending habits, and if all goes wrong, you can change that. In short, designing a controlled financial system is crucial to maintaining peace of mind. We can say that it is one of the building blocks of personal financial management, even if you follow a working pattern.

Understanding the credit score:

A credit score is the second pillar of money management. If you don’t know much about this term, you can find yourself in a vicious cycle of debt. There are specific ways to calculate credit score, and don’t forget to get the annual report to watch. In simple terms:

“Credit score shows a person’s ability to repay loans or mortgages.”

For example, before applying for a loan, the lender considers your credit score as your ability to repay. The score ranges from 350 to 850, and higher numbers show more credibility. So remember to pay your credit bills, installments and loans on time. Also, there are many ways you can adopt to increase the score. Besides that, get your credit report in time to know the financial status. Moreover, you will spot errors and frauds in time by getting a report.

Focus on savings:

If we look at the data, most people don’t prioritize saving, even though it’s an essential part of good budgeting. Later it leads to financial literacy and you can use lump money for the future. There are specific techniques and ways to save. For example, you can follow:

50-20-30 (needs, wants, and savings, respectively)
70-20-10 (needs, wants, and savings, respectively)
Follow the rule of 72 (it takes certain years to double the money at a specific rate of return)

People make the mistake of leaving their savings account last. But being a student of financial literacy, you should know that this is not the right thing to do. So, create an emergency fund because, according to research, about 67% of Americans have less than six months worth of savings.

Use financial management tools:

The world has made progress and there is a tool for everything that makes it easier. So, the same goes for financial literacy, and we should take help learning that money matters. Many services offer professional assistance whether you are a beginner or a complicated one. You can connect tools with savings accounts, credit cards, and mortgages to track expenses. Also, tools like payslip makers help track business-related expenses.

Pro tip: Remember to plan your retirement early. So start looking for the 401k plan or other retirement savings for a better future.

Understanding taxes:

We can’t ignore taxes when we talk about financial literacy. So here are some basic concepts that you should learn as a student in monetary school.

Tax type Explanation
Income tax Imposed by federal, state and local governments on individuals and businesses
Property taxes Taxed by local governments on real estate which you pay according to the value of the property
Sales tax Local and state governments impose sales tax on sales of goods and services.

Also, try to learn more about money matters using physical mediums or online. If things feel overwhelming, seek advice or use your network to learn. Above all, it is also essential to understand the risk of identity theft in the digital age. So always manage your money responsibly by controlling spending.

Sarah J. Greer