What is financial literacy?
Financial literacy is a term which popularity grows every year. On the one hand, there are more and more opportunities to raise your financial knowledge. On the other hand, the necessity of raising the competence of money handling becomes more evident. It concerns all of us no matter of age and salary scale. Everyone at least one time in life made a financial decision which was at peril.
No matter what goals you have — to save money for a vacation or become debt-free, financial literacy will help living a peaceful life. Would you like to gain good spending habits or teach your child to be financially conscious? We’ve collected information which is worthy for everyone.
What is financial literacy and what is it for?
Financial literacy is a set of skills that provide the right financial decisions concerning various spheres of life, including short-term questions such as vacation planning and long-term issues, like planning retirement.
A high level of financial literacy helps to manage money without stress but with substantial benefits. Competent money handling will help you stop draining your salary, raise your credit score and save your nerves. It is quite pleasant to have savings on big goals. Even more pretty to live without debts or have a minimal interest, right? Sometimes people living without financial difficulties seem like lucky men, but probably they can deal with money wiser.
This ability to handle money helps to get profit through the whole life. Ideally, a person, who is acutely conscious of his credit, knows his way around a budget, responsibly borrows and saves money.
But the reality is quite different: the average American encounters various difficulties in managing income and expenses. Just think: 40% of Americans spend up to half of their monthly salary in debt payments, according to Northwestern Mutual. Consistent purchases and investments are daunting to the majority of people.
As you see, comfortable and happy life is at stake, and people should be familiar with financial literacy since school days. That’s the reason why more and more people are aware of the importance of handling money.
The term “financial literacy” concerns the knowledge of statistics and economics, at least at a basic level. Of course, a professional background in the sphere of economy and accountancy will be your advantage and strengthen your skills in handling money. The basis of financial literacy, consisting of knowledge of economics and finance, will let you better understand such daunting issues as investments, debt, and emergencies.
Nevertheless, one of the first steps to a more financially conscious life is looking at the mirror, understanding one’s necessities, and embracing personal responsibility. Taking control of your spending habits is possible only through controlling your will and instant desires. So, if you can accept the fact of sacrificing immediate demands for long-term gain — congratulations, you are a step closer to successful money management.
Top 5 Core Components of Financial Literacy
Let’s continue emerging in financial literacy and find out its elements. The Financial Literacy and Education Commission tells about five components of financial literacy:
1. Earning & pure view of income and deductions
The sources of profit are investments, self-employment, and wage. Here, it is extremely significant to understand one’s gross and net income. Be sure that you know your comings and what deductions are made before spending money. After that, it will be possible to spend money with a sense that you are financially secure.
2. Responsible spending
Reasonable spending is one of the most significant components of financial literacy. At the same time, it is one of the most daunting skills which we all need. Spending reflects our lifestyle and core values which are sometimes hard to pursue. There are so many temptations to which we are exposed every day that we need to ask ourselves: “Are you sure that your spending habits are good?” and “Is your financial behavior built on NEEDS or WANTS?”
To find a balance between our desires and necessities is a foundation of controlling spending. It is hard to achieve controlling spending without applying additional tools, budgeting among them. Literal budgeting helps save money for long-term aims and prevents you from draining your account.
3. Saving & Investing
Financial experts recommend having a financial cushion — a personal emergency fund having at least three salaries. The latest survey of Bankrate has shown that only 39% of Americans have an opportunity to cover 1000$ setback in case of force majeure. And the opposite, about 40% of people won’t be able to cover even 400$ setback. That is, raising your financial literacy will help you achieve financial security and recover faster when life throws you a curveball.
Here are two saving tips. The first one is to let a portion of your salary automatically go to savings. The second important tip is not to use a savings account as a last financial priority. The other expert’s recommendation is to save less than 10% of your monthly salary for retirement. Ideally to have even more saving funds according to your unique situation. For example, it is useful to have a fund for paying off personal debts. These savings will help you not lose thousands of dollars in interest.
4. Borrowing
Borrowing could be the right decision, but only if you know how to maintain a healthy credit score. Besides, it is extremely important to realize how to compare loans and credit cards. Otherwise, you risk getting stuck in a vicious cycle and have to pay off the interest and drain your budget. That’s why wise borrowing and a good credit score are some of the most significant financial literacy components.
5. Protecting
Preventing fraud and identity theft is the fifth component of a secure financial strategy. The more a person succeeds in budgeting and saving, the more risks he can face. Thanks to digital banking, checking accounts for suspicious activity and keeping passwords secure is easy today. Nevertheless, it wouldn’t go amiss to buy an appropriate kind of insurance that will give you a more peaceful sleep and a sense of security.
Are you financially literate? Signs of a financially literate person
We just have emerged into the theory of financial literacy. Now let’s find out where financial literacy comes in on practice? Let’s look at financially literate people in actions and recognize ourselves or at least our familiar.
1. Handle money like a budgeting pro
Prioritizing is a life creed of a financially literate person. He is good at controlling his needs and wants and perfectly knows his financial credit.
2. Keep up an emergency fund and have personal savings
It is easy to maintain emergency funds and even have extra money. All you need is balancing income and expenses.
3. Take calculated risks
When it comes to investments, such kinds of people have a good strategy and know how not to lose everything in one deal.
4. Have managements skills and a healthy credit score
A financially literate person takes debts only in case of necessity and maintains a good credit score.
5. Play the long game
There are two ways of achieving financial goals. The first one is to make band-aid solutions, and the second way is to look for possibilities to get long-term benefits.
So, have you recognized yourself in all five points? Otherwise, don’t fret, as it is not too late to learn!
Here are also several important questions that help you find your weak sides in financial literacy and help to move forward:
- Do you know how to make a monthly budget? Does your budget include bills, basic expenses, debts, and savings?
- Are you debt-free? Do you take active steps to reduce your borrowings?
- Do you know how much money you need to cover your living expenses?
- What amount of sum do you need to cover the costs of living for three to six months?
- Do you keep your emergency fund which helps you to get through a layoff without borrowings?
- What kinds of insurance do you need to protect your finance and investments?
If you have answered “Yes” on all questions — you can proudly name yourself a financially literate person. You are one of 20% of people who can be qualified as financially competent! But it’s fair to guess that the majority of people have poor knowledge about money management. Statistics prove that fact:
- 20% of people don’t live paycheck to paycheck
- 32% of Americans stick to a budget
- 48% of participants (from 17000 people) have passed the test covered questions about financial goals, bills, and budgeting.
That’s why courses boosting financial literacy for people of different ages are relevant as ever. Furthermore, researches show the positive impact of these courses. For example, many young people have an opportunity to take personal finance course in high school, where students can take an understanding of key financial topics:
- Difference between credit and debit cards;
- How to pay income taxes;
- Difference between life, home, and auto insurance and how they work;
- How student loans work;
- How does 401(k) work.
Takeaways: the statistics show it is both possible and easy to raise your competence. If you are bad at budgeting and spending, maybe it’s time to gain new skills and an understanding of money management. Below we collected information on how to do it.
Why is it essential to be a financially literate person?
There is some information to strengthen your motivation to be competent in the question of personal finance. Over half of Americans feel anxious and uncertain when it comes to money. And the fact is financial challenges stress out people of all income levels.
A low financial literacy level led to difficulties connected with opening an appropriate bank account, budgeting, planning for retirement, and paying off debts from credit cards and loans. Just look at statistics based on a national survey on behalf of CareerBuilder:
- Nearly four of five Americans live paycheck to paycheck.
- Quarter of respondents never save money from month to month.
- 75% of people are not debt-free, and most of them suggest that they will always be in debt.
When life throws a curveball, Americans without savings have to deal with unexpected expenses variously:
- 39% of people use a financial cushion;
- 19% of respondents pay with credit card;
- 13% of them have to reduce their spending;
- 12% borrow from the nearest people;
- 5% take out a personal loan.
The statistics make us wonder about our preparation for the future. It leaves us with a choice: continue to be insecure and uncertain or become more financially and psychologically stable.
What action steps can you take?
Firstly, you need to get an idea of your monthly spending and identify your financial holes. Here are action steps that help you:
1. Track your monthly expenses
The foundation of a budget is tracking comings and goings. Each expense should be fixed in a notebook, as this is the only way to make your money holes and poor spending habits transparent. Luckily, today there are apps, which help fix goings.
2. Find out fixed and variable expenses
Have you already identified your monthly costs? Well, it is time to go into details. Define fixed dues: bill, electric and water, rent, mortgage, loan payment. After that, it would be easy to determine variable ones: haircuts, concert tickets, pet supplies, etc.
3. Calculate your average monthly spending
After approximately three months of budgeting, add up totals: find out how much, on average, you need to live comfortably one month?
4. Start analyzing
This step will help you to begin saving money. Look at your variable expenses and answer the question: “What variable expenses were worthwhile?”
5. Savings: always pay yourself first
That is, before spending your salary, take a portion of a paycheck into savings. If this practice becomes your habit, you will receive dividends throughout your life.
6. Set and stick to your budget
During budgeting, decide how much money you are ready to need on fixed and variable expenses, and the leftover is a sum that you have to live on.
Best apps for controlling money
Digital banking helps to handle income simpler. Now we can quickly complete financial tasks and, what is important, stay informed on your coming and goings. That’s why a mobile banking app became one of the criteria to choose a bank or credit union. It helps to control money, and raises habits, and also warns you about risks. We found it useful to tell about the best apps for 2021 according to Bankrate:
- Chase Bank,
- Bank of America,
- USAA,
- Alliant Credit Union,
- Huntington Bank,
- Chime,
- Varo.
Best apps for budgeting
Apps for budgeting will save both times on tracking your expenses and nest egg. It is much easier to control earnings and expenses when you list them. Here are some useful budgeting apps:
- Wally,
- You Need a Budget,
- FinStrong,
- HomeBudget,
- PocketGuard.
How to teach kids money responsibility
Fortunately, we have much room to improve the situation with money management. Literature, apps, and experts come to help us and make education thrilling and worthy. But the significance of means raises when it matters to kids. Explaining the value of money clearly and following their age and maturity is a challenge to parents. But the one way to help the next generation avoid crucial mistakes is to teach them essentials about money since childhood.
Below we collected money lessons under different ages. These lessons are developed by Beth Cobliner, a member of the President’s Advisory Council on Financial Capability and head of the organization Money as You Grow.
The sooner you start teaching is for better
Beth Cobliner recommends teaching a kid financial essentials after three years old. A child at the age of three can grasp some basic concepts like earning and spending. Isn’t it too early? Researchers at the University of Cambridge have determined: a person’s money habits are generally formed by the age of… seven! Thus, when your child is three, it is a good time for teaching
Money lesson for kids aged 3-5: teach them waiting
Experienced parents know: when you tell a kid that you don’t have money for a new toy, they may say something like “let’s use a credit card” or “let’s go to the ATM and take them”. They are so smart! But parents should be smarter. We need to give them a strong argument: “We are here to buy some groceries, and we are not going to buy something for you”. It is extremely important to explain that you visit a store not only for buying something for a kid. It sets the tone for future lessons. Thus, the main lesson is teaching to wait. Here are some activities which help you:
- Catch the moment in ordinary life for discussion how important it is to wait. For example, when you and your child are in line.
- Propose a kid to share money on three jars “Saving”, “Spending”, and “Sharing”. When he or she receives money, let a kid divide income equally on three jars. These jars may be the first funds of a kid. Money from the jar “Saving” will become a net egg for a more expensive purchase. The jar “Sharing” will help a child to make the first step for volunteering. Let him give money to someone in need. The jar “Spending” is pocket money that a kid can use for small purchases.
A lesson for kids at the age of 6-9 years: teach them choosing
First of all, a child should grasp the idea that money is finite. After that, they start realizing how significant it is to make wise choices. Share with them your own experience. For example, tell children why you chose generic grape juice instead of a brand name.
For kids at the age of 11-13 years: teach them to set a long-term goal
At this age, kids save money for long-term goals with pleasure, and parents may reap some benefits in this situation. It is a good time for introducing the concept of compound interest. The practice shows that it is much easier to explain using specific numbers and not abstractions. For example, you can make some compound interest calculations on Investor.gov.
For kids at the age of 14-18 years: involve them in making significant money decisions
Let your child take part in comparing colleges. Visit websites together and find out how much each college costs, including not only tuition but also other expenses. However, it is important not to discourage a teenager with the price tag.
Useful financial literacy games and books for kids
Books to raise kids and teens money responsibility:
- Money Ninja — book for ages three through eleven. It tells about three skills (spending, saving, and donating);
- If You Made a Million — a playful personage Marvelosissimo the Mathematical Magician tells children aged four through eight funny facts about money, finance basic, and ways to earn money on their own;
- Heads Up Money! — a must-read for grades 5-12 because it answers a lot of pressing questions about economics and finance. This book will raise financial competence for those who will pay their bills soon;
- One Cent, Two Cents, Old Cent, New Cent — if your child had already got an idea that money doesn’t grow on trees, he probably would like to know more about the nature of money. That book, for ages four through eight, tells the history of money in bright lessons.
Three popular financial games for kids of different age:
- Green$treets: Unleash the Loot — app for 5-8 years-old kids, the app where kids should spend money wisely to pass the game;
- Savings Spree — an app with a game show format for kids age seven and up. That helps kids to understand the significance of wise daily spending habits;
- Celebrity Calamity — is a game for pre-teens and teenagers. Users choose a star and run her life. The app shows teenagers how important to stick to the budget.
Takeaways
- Competence in personal finance can make people habitual budgeters who can achieve their goals and have dividends, including mental health at present and the future.
- Financial literacy covers many different areas, among them knowledge of economics, accountancy, and finance.
- Effective budgeting demands soft skills, honesty with yourself, awareness of personal credit and responsibility.
- The more effort a person puts into his financial stability, the more dividends he will have throughout his life.
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