You’re probably familiar with the term “literacy,” but you may have heard of a different, but similar term called “financial literacy.” The goal behind financial literacy is to develop a strong understanding, a firm grasp, of the basic concepts governing personal finances. When one becomes financially literate, they are in a better position to handle their money.
According to financial guru and author, Dave Ramsey, these are some stats on how Americans are controlling their own money:
- Almost one out of every five American workers are living paycheck to paycheck.
- More than 25 percent of U.S. workers do not save money each month.
- Nearly 75 percent of Americans are in debt, and most of them assume that will always be the case.
Ouch! With these figures, it’s clear that Americans need to shift their focus on financial literacy and eliminating debt. We should be asking ourselves: What skills and habits do the financially literate practice, and what do I need to do to improve my personal finances?
Financial Literacy Helps People Win with Money
Financial literacy is knowledge and understanding about personal finance, combined with skills and decisions that enable people to win in the realm of money. Knowledge is critical, but without application it’s useless. When the right decisions are made, and practiced each month, they lead to positive financial outcomes.
In order to become financially literate, you need to master these three things: 1) budgeting, 2) setting aside an emergency fund, and 3) understanding the short and long-term consequences of debt (including the psychology of debt).
Questions to ask yourself:
- Do I know how to create a monthly budget, which includes my basic expenses, my bills, my debts, savings, and funds for future purchases?
- Am I debt-free? If so, am I taking steps to reduce my debt?
- If I’m in too much debt, have I considered bankruptcy?
- Do I have an emergency fund so I can survive a layoff or another unexpected event without having to borrow money?
- Do I understand how compound interest grows over time?
- Do I know what kind of insurance protects my investments and finances?
- Do I know the difference between an investment and insurance?
If you feel as if you could become more financially literate, our advice is to start educating yourself on personal finance. You don’t have to spend much, if any money to do this. You can start by picking up books on the subject at your local library or browsing the internet for some great blogs and articles. Or, you can go to sites like Amazon to purchase books that will improve your financial literacy.