What is Financial Literacy?

Personal Finance
What is Financial Literacy?

What is Financial Literacy?

Empowering Yourself Through Financial Knowledge0

Random Financial Literacy Facts

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Financial literacy is the knowledge and skills needed to make informed and effective financial decisions. It empowers individuals to manage their money wisely, as well as having the ability to understanding budgeting, saving strategies, and investing fundamentals.

Financial Literacy & You

In today’s world, where financial security is becoming increasingly important, being financially literate is an essential skill one must possess. A solid financial foundation can help those live within their means, reducing the likelihood of incurring debt, developing credit histories, and achieving long-term financial goals. The benefits of financial literacy are not limited to just individuals; it can also improve an entire community’s economic and financial wellbeing.

Unfortunately, despite these numerous benefits, financial literacy rates remain relatively low among high schools throughout the country. A 2018 FINRA survey found that only 34% of Americans could answer five basic financial literacy questions correctly, indicating a significant gap in financial literacy. Therefore, it’s crucial to prioritize teaching financial literacy at all levels, from within our school systems and other informal settings such as the dinner table with those around us. Financial Literacy is a topic that must be widely accessible to everyone. The economy will strengthen as a result and pave the way to a brighter and sustainable future.

Budgeting as a Beginner

Budgeting is the process of creating a financial plan that outlines how to allocate available funds over a specific period. The period can range from as little as a few days to several years. Budgeting enables individuals and organizations to avoid financial hardship, stay on track with their financial goals, and make informed financial decisions. A budget typically includes an estimate of expected income and expenses to facilitate better financial planning. By using a well-planned budget, you can gain a better understanding of your spending habits, manage your finances effectively, and avoid overspending on things that are not necessary. One of the most popular budgeting methods is the 50/30/20 method, which divides expenses into three categories to help ensure balanced spending.

Needs

50%

Allocate 50% of your income
to cover essential needs.

Wants

30%

Allocate 30% of your income
to spend on non-essential wants.

Savings

20%

Allocate 20% of your income
to savings for emergencies.

Introduction to Credit

Credit can help individuals and businesses to access funds on demand to meet their financial obligations. In essence, credit involves borrowing money from a lender, typically a bank or a credit card company. The borrower agrees to repay the lender, usually with interest, over a specified period of time. If used correctly, credit can be an incredibly powerful tool for achieving financial goals. The three most common types of credit are revolving credit, installment credit, and secured credit.

Revolving Credit is a type of credit that allows you to borrow up to a fixed amount. This line of credit is most commonly used with credit cards.

Installment Credit is a type of credit that is paid over a fixed period of time with a set number of payments. Personal loans, car loans, and mortgages fall under installments.

Secured Credit is a type of credit that is backed by collateral, usually a property or a vehicle. A home equity line is a common example of a secured credit line.

Investing's Importance

Investing is an important aspect of achieving financial security and success. By putting your money to work for you, investing can help guide you towards building a brighter financial future. Choosing to invest in stocks, bonds, mutual funds, and ETFs is a wise decision to make as these instruments have historically yielded higher returns than traditional savings accounts. This provides a great opportunity for you to grow your wealth and help in achieving important financial milestones such as retirement, funding a college education, and even home ownership.

Investing early and consistently is key as it can help take advantage of the power of compounding – resulting in significant growth over time. While investing isn’t entirely risk-free, market conditions play a role in determining the short term value of your investments. However, in the long run, being patient and remaining committed to your investment strategy will likely result in a favorable return on investment.

Stock represents ownership shares in publicly traded companies. By purchasing stock, investors become partial owners of the company and have the potential to earn returns through capital appreciation (increase in stock price) and dividends (portion of company profits distributed to shareholders).

Bonds are debt instruments issued by governments, municipalities, or corporations. When you buy bonds, you’re essentially lending money to the issuer in exchange for regular interest payments and the return of the principal amount when the bond matures.

Mutual Funds are a type of investment that pools money from various investors and uses it to invest in a diverse portfolio of stocks, bonds, and other securities. Professional fund managers make investment decisions on behalf of investors, allowing them to access a greater selection of investments.

Exchange-Traded Funds (ETFs) are comparable to mutual funds, however, they trade like individual equities on stock markets. ETFs track a certain index, sector, commodity, or asset class and allow investors to diversify and trade throughout the day.

Frequently Asked Questions

Frequently Asked Questions: Financial Literacy

Financial literacy is the ability to understand money management skills such as investing, budgeting, personal finances, and the overall topic of money.

Yes, having a budget can assist you in achieving your financial goals if you are strategic in managing your finances. A budget is a great tool for getting out of financial holes as well as building up an emergency fund or savings.

Far from it. Credit is a great financial tool that can open up many doors for your financial future. It can assist you in getting equity into a property, purchasing a work vehicle, and much more. However, if you misuse credit, it can be detrimental to anything you are trying to build. You must be disciplined when dealing with any form of credit and only use what you can afford to pay.

Like anything in life, you need to put time into educating yourself on the topic. Never go into investments blindly. Understand what you are buying into. If you want to be successful with investing, you need to be hands-on with all investments, even if someone else is making the trades for you.