- Francesca Sacco
What is Financial Literacy and Why is it so Important?
According to Experian, financial literacy is the confident understanding of concepts that include saving, investing and debt that lead to an overall sense of financial well-being and self-trust.
But what does it mean to be financially literate? The goal of financial literacy is to establish a sense of control over your finances while simultaneously using money as a tool to freely make choices that build great life satisfaction. When you’re financially literate, you understand how to allocate your funds to several goals at one time. This includes savings, debt repayment and an emergency fund too. It also means that you have the tools to thoroughly research and evaluate loans, credit cards and investment opportunities.
What financial literacy in action can look like:
- Increasing your retirement savings rates every time you get a raise.
- Maintaining three to six months’ worth of expenses in an emergency fund and replenishing it after you’ve withdrawn money from the account.
- Comparing promotional periods on balance transfer credit cards so you have extended time to pay off debt.
- Checking your credit report regularly.
Financial literacy is important because financially literate consumers not only manage money with more confidence, but they are also better equipped to handle and prevent financial issues. Additionally, financial literacy can help consumers diligently save for items that matter to them.
Here are some ways that financial literacy can affect your life:
- Understand how much you earn and spend. When building financial literacy, making a budget is one important way to truly understand your income and expenses. Once you have a budget in place, you can track your spending and revisit your spending plan regularly.
- Repay and avoid debt. Seeking out the lowest interest rates when comparing loan terms can save a substantial amount over time. So can paying off credit card balances each month so you don’t accrue interest charges. If you already have debt, financial literacy can help you choose the best methods to get out of debt.
- Protect yourself from debt and bankruptcy. An important way to prevent debt from building up is to create an emergency saving account. Set aside enough money to cover three to six months’ worth of expenses and aim to keep it at that level at all times.
- Work towards a secure retirement. Whatever your short term plans are, be sure to also set aside money for retirement. As you become more financially literal, you’ll understand what type of retirement you want and how to get there.
Do you want to become financially literate, but are unsure of where to begin? Here are some simple steps that can help:
- Look for resources. Take advantage of free tools that might already be available to you. Your financial institution may already track your spending on its website or app. Several companies also offer free credit score monitoring. Tools like these can help you get an initial grasp of where you stand with your finances.
- Ask your employers. Some companies offer free financial counseling or financial wellness programs. As a result, you may be able to speak with a financial professional at little to no cost.
- Look into credit counseling. Credit counseling agencies also offer expert help with budget and debt payoff techniques. You can also consider a financial advisor. Financial advisors can help with goal-setting, tax planning, saving and paying down debt.
- Seek out resources from well-regarded nonprofits and agencies. They can help you learn the basics on your own time. Check out the Consumer Financial Protection Bureau, the National Foundation for Credit Counseling of the Financial Planning Association to name a few.
The more time and effort you to devote to financial literacy, the better off you’ll be. When you have the knowledge to make well-informed decisions, you’ll have the confidence to make sound financial decisions. From there, you can create and pursue financial goals that support your vision.
For more information on this topic, visit: https://www.experian.com/blogs/ask-experian/what-is-financial-literacy-and-why-is-itimportant/#:~:text=Financial%20literacy%20is%20the%20confident,made%20gains%20in%20recent%20years.