Financial Literacy Guide

Financial literacy refers to the ability to make smart financial decisions. It can help you spend wisely and control debt. Having firm financial literacy, will help you meet short and long-term goals like saving for a house or funding retirement. Let’s take a closer look at what financial literacy is and how to build your financial literacy.

Image

What is financial literacy?

Financial literacy is having the skills and knowledge to make informed financial decisions. If you have good financial literacy, you’ll be able to budget, invest, and manage your finances and debts. Using these skills can help you reach your short-term and long-term financial goals, from going on vacation to saving for retirement.

Components of financial literacy

There are several components of financial literacy, including:

Budgeting

A budget is a spending plan you can create based on your income and expenses. It can help you ensure you have enough funds for the things you need and want. Some examples of budgets you might want to consider include the pay-yourself-first budget, the zero-sum budget, the 50/30/20 budget , and the envelope budget.

Creating an emergency fund

An emergency fund can come in handy any time you have to cover an unexpected expense, like a car repair or a medical bill. If possible, save three to six months' worth of expenses in a high-interest savings account.

Investing

Investing is a great way people can build long-term wealth. You can invest for retirement through a 401(k) or IRA account. Other options for investing include a 529 college account to help you save for your children’s college or a mutual fund account you can use for any purpose.

Borrowing

Borrowing money in the form of loans and credit cards can make your life easier. You’ll be able to meet various financial goals, like buying a house or car even if you don’t have all the cash to pay for them upfront.

Why is financial literacy important?

Financial literacy can help you achieve financial stability and become self-sufficient. Having good financial management skills and understanding how money works can prepare you for unexpected expenses and help you plan for your future.

How to build financial literacy

Here are some ways you can start building your financial literacy:

Understand Your Current Financial State

Take the time to figure out where you stand financially. Visit AnnualCreditReport.com to pull free copies of your credit reports. Once you do, you’ll have a good idea of how you’re doing credit wise.

If you have a history of missed or late payments, foreclosures, bankruptcies, and other negative remarks, do your best to avoid them in the future. On the contrary, if your credit reports are in good shape, keep up the good work.

You should also review your current bills to understand your spending habits and debts. If you tend to overspend or find that you’re overwhelmed by debt, create a plan for how you’ll tackle these issues. You may need to create a budget or follow a debt payoff strategy like the debt snowball or debt avalanche.

Learn About Common Financial Terms and Concepts

There are countless financial terms and concepts out there. You’ll often see and hear them online, on the television, and on the radio. It’s wise to familiarize yourself with some of the most common terms and concepts such as:

APR

Annual Percentage Rate or APR is the total yearly interest of a loan you’ll have to pay to borrow that money. If you want to take out a loan or credit card, compare APRs to find the most affordable option.

A lower APR can save you hundreds or even thousands of dollars down the road. A good credit history may qualify you for a lower APR than someone with bad or poor credit. So you may want to improve your credit to increase your chances of securing an affordable APR.

Credit Score

A credit score is a three digit number that predicts how likely you are to repay debt. Lenders and creditors will often look at your credit score before they decide whether to approve you for a loan or credit card. Your FICO credit score, which is the most commonly used score will be determined by factors like:

• Payment history
• Total amount of debt you have
• Diversity of your credit accounts
• Length of your credit history
• How many recently opened accounts you have

Use Financial Tools to Boost Your Literacy

Financial tools can help you analyze and optimize your spending and savings. Fortunately, there is no shortage of them on the market and most options are free. Here are a few to consider:

• Acorns: Acorns is an app that makes it easy to automatically invest your spare change. Link the app to a credit or debit card and it will round up on purchases you make so you can invest the extra money without thinking about it.
• Qapital: With the Qapital app, you can save money toward specific goals. It allows you to create your own savings rules. Once you do, you can allocate money from each rule to a goal of your choice.

Use Financial Literacy to Improve Your Credit and Negotiate with Lenders

Personal financial literacy can give you the knowledge and confidence to negotiate rates. If you’re stuck with a high cell phone bill, for example, call up your provider and ask for a better deal.

In the event they don’t agree, do some research and find less expensive options. You can go through the same process to save money on your cable, utilities, and other bills. Don’t be afraid to negotiate rates on credit cards, loans, and subscriptions as well. A bit of time and effort can save you a lot of money in the future.

Apply Your Financial Knowledge to Build Wealth

To reap the benefits of financial literacy, build wealth. Every month, use some of your income to begin and maintain your savings account. This way you won’t have to live paycheck to paycheck and can fund emergencies as they pop up.

It’s also important to fund your 401(k), Roth IRA, or other retirement accounts. By making retirement a priority now, you’ll be able to enjoy a comfortable lifestyle in your older years.

Benefits of financial literacy

The benefits of financial literacy include:

Helps you manage your finances and debt

As a financially literate person, you’ll have control of your financial situation. You’ll know where you stand with your finances and be able to make appropriate changes to improve them.

Prepares you for emergencies

Financial literacy makes emergency situations far more manageable. If you have an emergency fund, for example, you’ll have cash saved up to help you out when life throws a curveball your way with a sudden expense, like a car repair or medical bill.

Can help you reach financial goals

Financial goals and financial literacy go hand-in-hand. When you have a good grasp on your finances, you’ll be more likely to meet your financial goals and succeed in the future.

Reduces financial stress

If you’re financially literate, finances won’t be as stressful. This is because you’ll know how to handle them appropriately and have the knowledge and resources to improve any unexpected or difficult financial situation.

When should I start building financial literacy?

It’s never too early to build financial literacy. No matter how old you are, it can help you make the most out of your hard-earned money today, tomorrow, and years down the road.

Advance America can help meet your financial needs 

If you currently need money to cover expenses, Advance America can help meet your financial needs. We offer payday loans, installment loans, title loans, and lines of credit that you can apply for from the comfort of your home and may get approved for instantly. If approved, you may receive the funds in your bank account that same day or within 24 hours. Visit Advance America today to learn more about the loans we offer.