When you hear the word financial literacy, what comes to mind? If you’re blanking and racking your brain to come up with a response, don’t worry- we’re going to fix that.
What is Financial Literacy?
Simply put, being financially literate means knowing how to manage your money.
- How does one create a personal budget?
- How does one manage credit?
- How should one save and borrow money responsibly?
- How should one invest and save for retirement?
All in all, financial literacy looks at how to earn, spend, save + invest, borrow, and conserve money.
So the question becomes, how does one develop these skills? Let’s find out!
Looking at Stats:
Currently, the lack of financial literacy is overwhelming:
- Savings rate-how much money a person puts aside for their retirement (as a ratio)- has dropped significantly.
- [2] There is lower participation in retirement savings plans [2]
- A study showed that 16% of teens were below proficiency level for financial literacy [1]
Basic Banking
A big issue we see is that a lot of people don’t know all the features that come with basic banking. Let’s delve into the basics behind these:
First, it’s key to know about the two types of accounts you can have:
Checking Account
- Accounts that are accessible at all times
- Acts as a cash replacement
- Can be accessed in a lot of ways: depositing checks, using a debit card or using one’s bank ATM
Savings Account
- Do you ever find yourself wanting to buy something that’s out of your budget? If so, you may make that wish a reality by putting money into your savings account!
- Putting money in this account prepares one to make big purchases [However, it’s key to note that interest rate on savings accounts fluctuates over time]
- Your money grows with time here (aka Interest!)
Credit Cards
From here, let’s look at credit cards. Free money? Not at all! Credit cards are quite literally the opposite of that:
- A credit card can become your best friend when your wallet screams that it’s empty. It’s basically instant credit! How does it work? It’s like a trading system or credit card issuer- you swipe the card for a certain amount, then you have a certain amount of time to get that money paid back to the bank or credit card issuer.
- The timeliness of these payments is part of what builds or decreases your credit score.
- Credit cards allow you to build your credit score (a number that tells people how likely you are to pay back borrowed money on time) if you make payments in a timely fashion
Why does credit score matter?
- People allowing you to borrow their money want a way to make sure you’ll pay them back. So the higher your credit score, the more likely a person/corporation is to loan you money.
- A high credit score also means you’ll be charged less interest [how much you pay for using someone else’s money]! Overall, basic banking has a lot more concepts that we can look into.
Once you understand the different options you have with payment, then you can move to understanding your banking statement [a record of your money in/out] and learning how to manage your checkbook!
Personal Budget
A personal budget is basically just a table of contents for your expenses- it’s a way for you to manage how you spend your money and prevent overspending.
How do you start with creating a personal budget?
- Start by tracking your spending habits for a month
- Categorize the month’s spending [ie: break down your expenses into categories such as food, entertainment, bills, etc] Once categorized, you’ll be able to figure out what costs are unnecessary and which ones are fixed. This may allow you to cut loose ends and save more!
Once you nail your personal budget, you can advance onward by creating an emergency fund– this is basically a safety net you’re creating for yourself if you ever find yourself in a financial emergency.
- You can use this safety net and pull money from it without damaging your savings account or other assets you may have.
Humanity Wealth Advisors has empathy for those forced to dip into retirement funds early, which is why we offer retirement planning at Humanity Wealth!
Retirement Savings
Picture this-you’re finally at the point in life where you can retire. But you hit a dead end when you realize that you didn’t save enough for yourself. How do we improve this? By creating a retirement plan!
- Figure out your timeline
- Look at your current age vs the age you want to retire. This will be your stepping stone as well as show what you need to do based on where you stand.
- Figure out how much money you’ll need to retire
- Look at your current income vs expenses
- Choose the right plan
401K: company-sponsored retirement plans
- Create your own retirement savings account
How Can I Get Started?
Getting started is very simple and once you start, you won’t regret it. It can be a complete game-changer for your wallet and your future!
- Create a personal monthly budget catered to you
- Create an emergency fund
- Create a retirement plan
- If you have debt, make a plan to erase it
- Determine your credit score [ie: ways to improve it]
Impact
After having learned the basics, you should be able to
- Create a Personal Budget
- Start an Emergency Fund
- Understand Loans, Credit Score, and Credit Cards
- Determine Financial Goals [Emergency Fund Creation, Retirement Planning, Saving, Addressing Debt]
Sources:
U.S. National Strategy for Financial Literacy 2020. (n.d.). Retrieved March 7, 2022, from https://home.treasury.gov/system/files/136/US National-Strategy-Financial-Literacy-2020.pdf
Published by Statista Research Department, & 21, F. (2022, February 21). U.S.: Personal Saving Rate Monthly 2021. Statista. Retrieved March 14, 2022, from statista.com
*This material is for general information only and is not intended to provide specific advice or recommendations for any individual.
