Financial literacy is the possession of skills that allow people to make smart decisions with their money. Although understanding statistics and facts about money is great, no one really understands financial literacy until they can regularly do the right thing with money that leads to the right financial results. Once you have this set of skills, you can understand the big financial issues most people face: emergencies, debts, investments, and more.
Financially savvy people know how to get through a budget, they know how to use the money they run out of, and they know the difference between a 401 (k) plan and a 529 plan. educated consumers:
Budget, emergencies, debt
Budget
Most Americans live from paycheck to paycheck, and this is largely due to the gap between what maths say they can afford and what they actually spend. Financial literacy can make people on regular budgets willing to make savings on their goals and delay the satisfaction of having peace of mind today and in the future.
Emergencies
Only 44% of Americans could cover a $ 1,000 emergency today. About 40% could not cover an $ 400 emergency. People who become financially literate understand the wisdom of saving for those moments in life.
Debt
In addition to mortgages, which amount to nearly $ 9 trillion in national debt, Americans are burdened with car loans, credit cards and student loans. The Federal Reserve Bank of New York reported in 2018 that the total consumer debt in America reached $ 3.95 trillion. To see how this debt burden affects daily life, consider the fact that Northwestern Mutual reported that 40% of Americans spend up to half of their monthly income on debt payments. Much of financial education focuses on understanding how time and money people spend on debt relief is detrimental to their ability to invest in their future.
Although there is no sure way to measure how many people are financially literate, a lack of certain skills would confirm this conjecture. For example, if you used the number of people not living on wages as an estimate of financial education, only about 20% of people would qualify.
Are you financially literate?
To help you decide if you should include yourself among the financial documents, consider the following questions:
- Do you know how to create a monthly budget that includes all your basic expenses, your bills, any debts and your zero funds for future purchases?
- Are you debt-free or are you taking active steps to reduce your debts?
- Do you know how much you spend to cover living expenses over a period of three to six months?
- Do you have an emergency fund that would allow you to get through a sudden, unexpected life event without borrowing money?
- Do you understand how compound interest allows invested money to grow over time?
- Do you know the different types of insurance required to protect your finances and investments?
- Do you understand the difference between investing and insurance?
Hopefully you were able to answer “yes” to all – or at least some – of the evaluation questions. But if you find yourself answering “no” to some, do not be discouraged. There are steps you can take to better understand how money works:
Start an emergency fund for beginners
Start saving $ 1,000. This is to prevent you from being thrown out when you are hit by these inevitable, difficult financial events. Do not worry if this does not sound like a lot of money. You will increase this emergency fund very soon.
2. Get out of debt
To get rid of debt, start by listing the smallest to the largest. Then use the avalanche method to repay them. As you pay off the smaller debt, you transfer what you paid to the next larger debt. Repeat this process until all your debts are gone, except your mortgage.
3. Complete the emergency fund
To complete this step, move all the money you owed when repaying the debt to increase the emergency fund to three to six months of spending.
4. Invest 15% of your retirement income
It is never too late to plan your retirement. Eighty-seven percent of students attending a finance course agree that they feel confident about investing. You can look to the future with hope when you have a plan that includes smart retirement investments.
Use well-developed mutual funds in a tax-savings retirement plan, such as a 401 (k) or Roth IRA. An investment of 15% can help you ensure that you beat inflation in the long run while still having enough income to pay off your home.
5. Save for college
More than half (51%) of high school economics students plan to pay for college on their own. Two of the best methods are the Savings Accounts (ESA) and the 529 programs.
6. Repay your mortgage early
This monthly housing payment is one of the biggest expenses for most people. Imagine having your home free and clean.
7. Build wealth, and give generously
The purpose of financial education is not just the knowledge of the head. The real goal is to be able to use your money to do the things you want to do, such as retire with dignity, spend free time with family, and pursue worthwhile goals.
By now, you may have a pretty good sense of where you stand in terms of your own financial education. You may have a lot to learn, but I hope it is encouraging to know how increasing financial education could transform you, your community, and perhaps the nation as a whole.
After earning $ 500,000 in scholarships and graduating from her dream school with a bachelor’s and master’s degree, Kristina Ellis began helping students create their own plan to earn a debt-free education. She is the best-selling author of Confessions of a Scholarship Winner and How to Graduate Debt-Free. He is an expert on the 2021 documentary Borrowed Future: How Student Loans Are Killing the American Dream.