Understanding how to make sound financial decisions to confidently manage and grow your money is financial literacy and it’s quite important.
The importance of financial literacy cannot be overemphasized as it helps you allocate your income towards various goals. Not only does it help you with ongoing expenses, but it also helps you with savings, debt repayment, and for such a time when you will be in a tight spot and need financial help. When you are financially literate, you can navigate the financial marketplace with confidence. You also have the tools with which to thoroughly research things like loans, credit cards, and investment opportunities.
What Does It Mean to Be Financially Literate?
According to the Federal Financial Literacy and Education Commission, established by Congress in 2003, five key principles of financial literacy has been identified. According to the commission, being financially literate means understanding each of these components:
- Your earning, including your pay, benefits, and tax withholdings.
- How to save and invest, plus creating an emergency fund and setting money aside for short and long term goals.
- How to protect your money by buying insurance and detecting and avoiding fraud.
- Spending wisely through budgeting and comparison shopping.
- How to borrow money at the lowest possible interest rate, as well as how to keep your credit strong with responsible repayment habits.
When you are financially literate, you can:
- Compare promotional periods on balance transfer credit cards in order to have an extended time to pay off debt.
- Increase your retirement savings rate every time you get a raise.
- Check your credit report regularly for errors.
Why Financial Literacy Is So Important
As a financially literate consumer, you can manage money with confidence. This means that you will be able to allocate their earnings to their goals and limit or attack their debt. With financial literacy you can:
- Understand how to budget.
- Understand and manage debt.
- Know how the emergency fund works.
- Plan for retirement.
Building Financial Literacy
Eager to become more financially literate? there are some tools you can use on your own to help understand and manage money.
- First, you can start with tools that are available for free from your bank, credit union or credit card issuer. You can utilize your bank’s app or website in tracking spending patterns. Most banks also offer free credit score tracking programs.
- You can also consider using a third-party budgeting app, in order to stay updated on spending and financial goals. A budgeting worksheet like that offered by the Consumer Financial Protection Bureau (CFPB) can also help. CFPB offers many consumer tools on a range of topics, which includes guides on how to make financial decisions like buying a house.
- There are also local resources you can use like your state’s consumer protection agency or attorney general’s office provided to support consumers and may offer educational programs on financial topics. Also, credit counseling agencies, that employ counselors who are certified in budgeting and debt reduction techniques, are useful options.
- Also if you can afford it, you can consider working with a financial advisor like a certified financial planner. They are vested with deep expertise in complex financial goal setting. Their services can include guidance on tax planning, saving for college and retirement, as well as paying down debt. Look for a certified financial planner in your area or one you can remotely work with.