No one enters life knowing how to do everything. We must learn how to do many things, from tying our shoes to driving a car. Most of these learned skills come with age. But one learned skill many people overlook is money management.
We don’t come into the world financially literate: We must learn how to wisely manage our money to know how to avoid debt, save money, grow our wealth and more. Much like we need to become literate to read, we need to become literate to proficiently manage our money.
Why is financial literacy so important?
Money touches every aspect of our lives. We work for a living, we make purchasing decisions and we plan for our future. Each of those facets of life require financial knowledge to make the best decisions for our present and our future.
Money is a tool that helps us get where we want in life, but only if we know how to use it. This doesn’t require us to be experts with money, but it does require a willingness to learn how to manage money ourselves, or the know-how to hire someone to do it for us effectively.
What can’t be overstated is the role money has on our mental and emotional well being.
“Our financial health and strength is just as important as our mental, emotional and physical health and strength,” says Krista Neeley, vice president of Appreciation Financial. “Taking time to better understand and empower yourself financially can be the backbone of creating the freedom, flexibility and peace of mind you desire for your future.”
Becoming financially literate can be overwhelming if you’ve never taken money seriously. But it only requires starting with a few simple steps. You may make mistakes — and that’s okay. Growing in financial literacy helps you know how to avoid future mistakes and create a game plan to master your money.
Here are four basics you need to know right now to help build your financial literacy.
1. Know where your money is going.
The first step to becoming financially literate is knowing where your money goes each month. This sounds an awful lot like a budget. A budget is a great way to manage your money, but you must first start with tracking your spending. That shows you where each dollar is going and if it needs to be spent in a more efficient manner.
This sounds difficult, but it’s quite simple. Tracking your spending is simply writing down everything you spend money on during the month.
You can write it down on paper or use an Excel spreadsheet. You can also use free services such as Mint or Personal Capital to track your spending. Regardless of the tool you use, tracking your spending gives you knowledge of how to improve your finances. Knowledge is critical because it breeds power to manage your money confidently.
2. Avoid debt at all costs.
Likely the most critical financial literacy component is avoiding debt, especially high-interest credit card debt. Credit card debt enslaves you to others and keeps you from reaching life goals.
As with tracking your spending, write down all your debt. Record who you owe, the amount and the interest rate. Then make a plan to attack the debt. Tracking your spending likely will reveal savings opportunities. Use those savings to throw extra money at your debt.
You can also look for ways to lower the interest rates being charged on your debt. Consider consolidating your debt or using a balance transfer credit card to make your payments more effective.
3. Save for the future.
Saving for the future builds on the previous two concepts. Think of saving for your future as paying a bill to your future self or paying yourself first. Saving and investing, just like avoiding debt and tracking your spending, need to become a habit to truly grow your money.
The best way to do this is through automation. Many banks allow you to automate deposits into your savings account for free. Take advantage of that to grow your savings.
If you don’t have an emergency fund, now is time to start one. Growing a savings account of even $500 or $1,000 can help you avoid the cycle of debt.
How much should you save? “You should always remember that one of the primary principles to building wealth is to pay yourself 10%,” says Neeley. “That’s money you’ve earned and deserve to keep.”
4. Make learning a lifestyle.
Key to growing in financial literacy is adopting a learning mindset. You don’t need to be an expert to manage your money effectively — but you do need to make learning a lifestyle.
This, too, can be done simply. “A common misconception is that finances are complicated and/or expensive.” Neeley says. “Finances will only grow if you start saving and stay committed.”
There are many free resources online, through books or through your employer that can help you develop the knowledge you need to succeed with money. The key is to take a step to start building that knowledge — and the confidence that you can be effective in working with money.
Financial literacy may seem difficult. Thankfully it’s not. By taking a few simple steps in educating yourself, you can gain the knowledge you need grow your money.
Article Credit: http://workwell.unum.com/2018/09/4-ways-become-financially-literate/
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