Top Five Components of Financial Literacy

Building your financial literacy level probably is not high on your to-do list. But, learning how to manage your money is an imperative life skill. With the vast array of books, blogs, podcasts, and much more accessible today for free, it is hard to go through all the information. Even more so, there are fundamentals of finance that are more important to know such as how to manage loans, debt, budgets, insurance, and investing to name a few.

To help you get started on the basics, here is a list of five components of financial literacy to lead you toward feeling empowered to make good financial decisions.

1.Earn

Understand how much money you make. Do you get paid the same amount each month or does it fluctuate? Take a look at your paycheck to identify how much your gross and net income are, and what deductions are made, such as health insurance or 401K. Once you determine your monthly income, it becomes easier to create a budget to know how much money you can spend.

2.Spend

Knowing how much money you earn allows you to allocate your funds. The best way to know how much you can spend is to make a budget. A monthly budget helps you track your spending so you can determine how much to spend on different categories and still be able to save. A good rule of thumb is the 50 30 20 Rule. The 50 30 20 rule recommends allocating 50% of your net income on basic needs, 30% on nonessentials and 20% for savings. Though this rule may not work for everyone, it is helpful. (Go back and read our blog post “Tips for Starting and Sticking to a Budget” to learn more about how to successfully budget!)

3.Save and Invest

We all know that saving money is important. We need to save for things such as an emergency, retirement, a big purchase, and to pay off debt. Financial experts recommend having at least three months worth of basic living expenses in an emergency fund and setting aside 10% of your income for retirement. Additionally, saving and investing are mutually connected. By setting aside money you will prevent financial setbacks from overtaking and give you peace of mind. Investing money is a good management tool because it leaves you with more money in the bank and with another stream of income.

4.Borrow

Even with saving, at some point you may need to borrow money. You may borrow money to cover a large expense (like a home or car), a loan (such as student loan or personal), or debt consolidation (like paying off loans or credit cards). Remember, borrowing money is not a bad thing; just make sure you compare loans, rates and maintain a healthy credit score.

5.Protect

Protect the money you have made. Regularly check your bank statements and accounts for mistakes or suspicious activity. Keep your passwords and documents secure to eliminate scams and theft. Monitoring your accounts is even easier today with digital banking; anytime and anywhere you have access to your accounts to stay updated on your finances. You may even consider buying the right kind of insurance to protect yourself in an emergency.

The topic of personal finances is confusing and overwhelming to more people than you may think. This illustrates a need for many of us to better understand and utilize the various educational tools around to learn how to better use our money. Remember these five components - earn, spend, save and invest, borrow, and protect - as you improve your financial literacy and beginning better spending habits.