Tips for Building Financial Literacy
What Is Financial Literacy?Financial literacy refers to your ability to understand financial terminology and develop skills related to financial management. Financial literacy starts with basic tasks such as budgeting, saving and investing. It can also help you achieve life goals such as retirement, planning your education or starting a new business.
Ideas for building your financial literacy include; reading financial blogs or books, listening to podcasts or attending financial literacy workshops like SDCCU’s Financial Wellness Wednesdays webinars.
How to Build Financial Literacy
Create a Budget
The National Foundation for Credit Counseling reports that three in five Americans do not keep a regular budget. A budget helps you define your spending goals and track where your money is spent each month.
Creating a budget is easier than you think. Start by making two columns in a document. In the left column, list all your sources of income, such as your earnings after taxes. In the right column, list all of your monthly expenses. Start with your fixed expenses, such as mortgage, rent or utilities, then leave yourself room for variable costs like hobbies or entertainment.
Need a little guidance? Many financial experts recommend the 50-30-20 rule. That means you’ll devote 50% of your income to your “needs” — your regular living expenses — and 30% to your “wants.” The remaining 20% should go toward savings or investments.
Audit Your Statements
Once you set up a budget, it’s time to give yourself an audit. Pull up your bank and credit card statements from the last three months and see how your actual spending matches up with the budget you created.
Chances are that your real-life spending patterns don’t exactly align with your financial aspirations, and that’s okay. The point of this exercise is to reveal areas where you need to improve. Cutting back on the number of nights you dine out or the number of streaming subscriptions you have can create the margin you’ll need to save or invest. Learn more tips on how to save money here.
Build an Emergency Fund
According to a recent survey, only 39% of Americans had enough money in their savings account to cover a $1,000 emergency expense. If you currently don’t have an emergency savings fund, if an unexpected expense arises, you’ll only end up depleting your primary savings account — or worse, adding expenses to your credit card. This could cause high-interest payments until you pay off the balance further depleting your savings.
How much should you put into an emergency fund? It’s best to have enough money to cover three to six months’ worth of expenses. This provides some cushion in the event of an unexpected car repair, medical bill or if you find yourself between jobs. Put your money to work for you by using a high interest savings account so you have access to it when you need it, while also earning additional money.
Define Your Goals
The above tactics focus on managing the money you currently have, but it’s also important to consider your short and long-term financial goals. What are your long-term plans? What do you need your money to accomplish?
Common goals include paying off debt, retirement savings or starting a new business. Defining your goals will shape your strategy for saving and investing. It will also provide you with a sense of purpose and something to work for as you trim your budget.
Learn to Invest
More than half of young Americans are not investing in the stock market. Many simply don’t feel comfortable navigating the confusing world of investing. Investing allows you to put your money to work, watching it grow over time. It’s never too late to learn how to invest in your future.
Many investment experts recommend that you invest 15% of your pretax income. Remember the 50-30-20 rule we mentioned above? If you follow that rule, you’d save 5% of your income and invest the rest.
Investment firms can help you get started with a mutual fund, index fund or even an exchange-traded fund (ETF). These vehicles provide instant diversification, giving you a safe entry point to build on in the years ahead.
Maintain Your Financial Literacy
These basic tips form a useful starting point for building your financial literacy, but there is always room to grow.
Visit our Financial Knowledge Blog to learn more tips on setting up a solid financial future or join us for Financial Wellness Wednesdays.