Financial literacy is understanding how to manage your personal finances. It includes skills like budgeting, saving, borrowing, investing, and day-to-day money management. According to Standard & Poor’s Global Financial Literacy Survey, only 57 percent of Americans are considered financially literate. If you’re not sure where you fall, consider some of the important components of financial literacy:
Financial Literacy Helps to Improve Budgeting
Your budget is your financial plan, and it includes your income and expenses. In a perfect, financially responsible world, you know exactly what you earn and where every penny of your money is spent. But we don’t live in a perfect world. Although most Americans say they have a budget, as of 2019, nearly 80 percent also say that they have trouble sticking to it, with the average American spending approximately $7,400 over their budget each year.
To create an effective budget, be realistic about what you earn and spend each month. Start with last year’s monthly base net income (earnings after taxes are taken out), which is your monthly take-home pay. Don’t include bonuses because they are not always guaranteed. Now, take a look at whatever records you have that can tell you how much you spent. Whether you typically use autopay that deducts money directly from a checking account, an app on your phone, a check, or actual cash, do your best to chart the bills you paid over the year and the purchases you made. Be sure to include items such as rent, utilities, insurance, groceries, clothing, car payments, cell phone, credit card payments, gas, loan payments, and other recurring expenses. Now take a close look at expenses that might be less consistent such as dining out and vacations. Maybe you had some unexpected expenses last year like a medical bill you hadn’t planned for or the purchase of a new car to replace an old one. It’s better to include something that is a one-off expense than to miss something.
Once you have your earnings and expenses, side by side, deduct expenses from earnings. Did you overspend last year? Perhaps you had money left to save. Whichever the case, use the information to create a monthly budget that makes sense for where you are and how you want to step into your financial future.
Financial Literacy Promotes Helpful Money Management Practices
A solid budget strategy can be the foundation for helpful money management practices. Once you understand the income you generate and the debt you might incur, you can put savings and growth plans into action. There are several tools and technologies that can help you get started:
- Annual Credit Report: Your credit score can help you borrow money on better terms and potentially save thousands of dollars. Under the Federal Fair Credit Reporting Act, you are entitled to a free annual copy of your credit report from each of the national credit bureaus: Equifax, Experian, and TransUnion. Your credit report is a summary of your credit history and is an important tool to use when refinancing or applying for a loan. Visit AnnualCreditReport.com and make a habit of reviewing your report regularly. Correct any errors you see. You may want to stagger your requests with each of the agencies so you can take a look at a report three times a year.
- AutoPay: Most bills you pay can be connected to your bank and set up for autopay. The advantage of linking your bank account to your recurring bills is twofold: 1) you won’t ever miss a payment, and 2) many companies offer discounts to customers who use autopay. However, it’s critical that you understand your payment and billing schedule, so you always have enough funds to cover withdrawals.
- Digital Money Management Apps: Whether you want to chart your day-to-day expenses or plan for retirement, there are a variety of apps that may help. Mint* is a free online money management tool that lets you monitor all your financial accounts and transactions. It helps you set budget and savings goals while charting your progress. A similar paid tool is Simplifi, Quicken’s** mobile budgeting app. Simplifi can help you identify recurring expenses, add them to your calendar, and incorporate them into a spending plan. It can connect your regular accounts, credit cards, loans, and even investments like a 401K in one dashboard. Personal Capital*** allows you to see all your accounts in one place, while also helping you prepare for retirement. The app’s Retirement Readiness Score™ helps you plan for the future. There area lot of apps out there and many of them are free. What you want is a secure piece of well-vetted software that can help you set financial goals and follow through on those goals.
- Loan Calculators: At some point, you may need a loan for a big purchase. Whether you want to buy a car, refinance a mortgage, or buy your first home, before you do, consider the cost of borrowing. A loan calculator can help you compute your monthly payment based on the amount you borrow, your deposit, interest rate, and length of the loan. It will also show you what you’ll pay over the length of the loan.
Saving Money with Financial Literacy
When you know what you earn and what you spend, you may be better equipped to save money. After a look at what you have spent over a whole year, you may be able to find places to trim. That latte that you indulge in only three days a week can still cost more than $700 in a year. Eating dinner out can easily add up to thousands of dollars. Take a hard look at your expenditures and decide where your money might be put to better use. You can take what you trim and put it in long-term savings. You can also arrange for a portion of your paycheck to go directly into a savings account, or you can have your bank transfer money into a savings account every week, so you don’t spend it.
Financial Literacy Helps You with Personal Loans
At pivotal moments in your life, it’s likely you may need to borrow money, perhaps for a first car, your college education, or a dream home. Financial literacy helps you weigh all your options and choose a lender with care. It also helps you understand how your personal credit report can help you get the best loan for your specific needs. Among the loans you might consider are:
- Auto Loans
- Personal loans for:
- Unexpected Expenses
- Debt consolidation
- Home Improvements
- Vacation Loans
- Wedding Loans
Financial Literacy Helps Investment Strategies
As you progress along the financial literacy ladder, you may want to modify the way you save money. Take the time to learn and make choices that may help you achieve your long-term financial goals. Research investment options such as mutual funds, index funds, exchange-traded funds, stocks, and bonds. Whether you decide to contribute to your company’s 401K or seek out a certified financial planner who can share their skills to help you invest independently, set goals and regularly track your progress.
When you have a better understanding of your finances you have the knowledge to help make better decisions for your future. You may be able to better monitor income and debt, increase your savings, reduce money stress, and be prepared to reach your long-term financial goals
Mariner Finance looks at the full financial picture and helps borrowers by providing personal loan options to meet their specific needs. Mariner may be able to provide you with financial resources, including access to MoneySkill, which is a free online personal finance course designed to teach you financial concepts and how they apply to the real world. If a loan is part of your financial future, contact Mariner Finance today.
*Mint is a registered trademark of Intuit Inc.
**Quicken is a registered trademark of Intuit Inc., used under license.
***© 2022 Personal Capital Corporation, an Empower Company.