Financial Literacy: Staying Informed in These 5 Key Areas
Nobody is born with a comprehensive understanding of all things related to personal finance; we all have to learn as we go. And sometimes the journey is less than smooth. Have you ever been left scratching your head after hearing about a certain financial concept? If so, you’re far from alone. Instead of feeling confused or left behind, think of it as an opportunity to continually learn more about what it takes to successfully manage your money in this day and age.
It’s important to keep increasing your financial literacy over time—also known as “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.” Before you can make smart choices about handling your money, you need to establish an understanding of certain terms and practices.
Looking to boost your financial literacy in the near future and beyond? Start by staying informed in these five key areas.
Budgeting: How to Balance Saving vs. Spending
It’s tempting to take the “ostrich approach” to spending—sticking your head in the sand to avoid confronting your financial habits. But the only way to truly take control of your destiny is to track your spending and set savings goals. Everyone can benefit from setting aside some time each week to budget. Budgeting is the best way to learn your habits, then enact constructive changes to meet your goals.
Start by tracking your spending for a week, then a month. Notice your habits. Create a handful of categories reflective of your spending habits—like groceries, eating out, transportation, rent/mortgage, travel, clothing, etc. Then pick three categories you’d like to bring under control by setting specific goals. The money you save can go toward beefing up your savings or paying down debt.
Understanding the Risks and Rewards of Credit
Considering how easy it is to get a credit card, understanding the ins and outs of credit can be a real challenge. To start, there’s your FICO score between 300 and 850 made up of factors like payment history and credit mix. There’re the implications of interest rates, which are very important to understand before signing up for any offers. It’s also important to understand minimum payments, which do stave off late fees but do not prevent interest from accruing in the background. Consumers can also benefit from learning about balance transfers in which they transfer a high-interest balance to a card with low or no APR.
Learning About the Causes and Effects of Debt
Debt is a widespread phenomenon. According to industry expert and Freedom Debt Relief co-founder Andrew Housser, we’re seeing rising consumer debt for a few reasons: Low household savings rates, a lack of emergency funds to cover unexpected expenses, stagnant wages and rising costs of living, to name a few. If you’re one of the many Americans in debts, you’re far from alone. Boosting your general financial literacy surrounding the topic of debt can help you pull yourself out of it because you’ll gain a better understanding of your options, from credit counseling to consolidation loans, settlement programs, bankruptcy and do-it-yourself tactics.
Retirement: Looking to the Future
Whether you’re 25 or 55, retirement should be on your mind. Unfortunately, most Americans nearing retirement have only about $120,000 saved up. While this looks like a lot on paper, it’s really only about 12 percent of the $1 million many experts recommend.
What’s important to grasp about investing for your retirement is that compound interest, or the fact that both your original investment and its interest accrue interest, works best over the long term. This means the more you can save and the earlier you do so, the more payoff you’ll reap.
Building wealth is really the culmination of all your efforts in these other categories. It also entails understanding how to smartly invest your money. Speaking to a financial advisor can help greatly in this department, but it’s also possible to use the internet’s free resources to educate yourself.
Staying informed in these five important areas will kick-start your quest for greater financial literacy.