Why is Financial Literacy Important?
According to the Pew Charitable Trusts, 80% of the American population is in debt, and the majority finds it very challenging to be debt-free. Another study by Bankrate shows that only four in ten Americans can afford a $1,000 unexpected expense, given that eight in ten workers in the US live paycheck to paycheck. Most of the population makes financial decisions such as signing up for loans or credit card debt without understanding the consequences of their actions. Promoting financial literacy and education can curb this effect and prevent it from spiraling further in future generations.
What is Financial Literacy?
Financial literacy is one of many essential skills to learn in today's world. Financial literacy education can aid in personal finance decisions, reduce mistakes, reach financial independence, and become financially self-sufficient.
A financially literate person can analyze their earnings and change their habits to improve their quality of life in the short term and the long term. They can handle their typical monthly expenses by budgeting, establishing an emergency fund, properly managing debt, accurately calculating interest, and contributing to savings and investments.
For example, a financially literate person will increase their retirement savings rate in response to a raise to ensure financial success. In addition, they will regularly check their credit report and explore interest rate options to pay off their debts.
Benefits of Financial Literacy
Financial knowledge is a key to break the poor money management cycle that many Americans are stuck in. Becoming financially literate will help you understand how to budget, manage debt, build an emergency fund, plan for retirement, and understand taxes.
Benefit 1: Creating a Budget
Creating a budget is the first step in managing your money effectively because it helps put cash towards priorities and goals. To save, pay off debts, and manage your monthly expenses, you must have a firm grasp on how much money you earn and properly allocate every cent. Once your budget has been established, and you know what to spend money on, financial education will help you understand when to revisit your budget and change your new financial goals.
Benefit 2: Managing Debt
A financially literate person can assess their credit score and understand how to improve it. They also recognize the importance of interest rates when it comes to loan terms. Financial literacy will help you navigate complex scenarios and identify the best ways to quickly avoid and get out of debt to ensure financial wellness. Having a good credit report and credit score will allow you to get better credit cards and loans with better interest rates. Good credit will also help you achieve other milestones in the future because it is one of the essential parts of your financial health.
Financial literacy will help you avoid making purchases on credit when you cannot afford the monthly charges. This, in turn, helps people pay down more of the principal on their credit cards, which can help them get out of debt faster. In addition, it will teach to compare and prioritize the interest rates of each debt and be able to consider debt consolidation as a viable option.
Benefit 3: Having an Emergency Fund
Establishing an emergency fund goes hand in hand with avoiding an accumulation of debt. An emergency fund is a savings account with enough money to help you during times of uncertainty. Typically, an emergency fund should contain enough money to cover three to six months of expenses and necessities. To figure out how much money you should have in your emergency fund, check your bank statements and see how much you spend on essentials every month.
Benefit 4: Planning for Retirement
When you improve your economic education, you can identify how much money you ideally need for retirement planning. You will also determine what types of investments and savings accounts will help you get there most efficiently. Both bonds and a 401k are options for retirement planning, and solid financial literacy will allow you to make a decision that fits your needs best.
Benefit 5: Understanding Taxes
Financial literacy offers a better understanding of taxes, a viable skill when calculating tax rates and determining after-tax income. This is helpful to determine whether a job offer will meet your financial needs or understand the appropriate pricing strategy for your product or service. There are many online calculators that you can utilize to understand taxes.
How to Learn About Personal Finance
The proliferation of blogs, podcasts, YouTube channels, books, and other outlets has given people easy access to enhance their financial literacy. Any of these outlets can positively affect someone's financial situation short term and long term. These financial resources will also introduce individuals to new ideas that can lead them to save or make more money.
Take a Free Online Class
There are many resourceful online personal finance classes to help you build your financial literacy. Below are the top 13 courses that are free of charge.
Udemy
- The Core Four of Personal Finance
- Personal Finance 101
Coursera
- Personal and Family Financial Planning
EdX
- Personal Finance Planning
- Finance for Everyone: Smart Tools for Decision-Making
Alison
- Financial Literacy
- Introduction to Managing Your Personal Finance Debts
- Introduction to Simple and Compound Interest
Skillshare
- My Financial Mountain: Understanding Your Path to a Solid Financial Foundation
Khan Academy
- Personal Taxes
- Housing
- Investment Vehicles, Insurance, and Retirement
Purdue University
- Planning for a Secure Retirement
Watch Videos on YouTube
Watching videos on YouTube is another excellent way to learn more about personal finance without having to spend much. Here are the top-rated personal finance channels on YouTube to consider watching to learn about budgeting, investing, taxes, and much more.
- Graham Stephan
- The Financial Diet
- Joe Fairless
- His and Her Money
- Debt Free Millennials
- BeatTheBush
- REtipster
- MappedOutMoney
- Financial Education
- The White Coat Investor
- Grant Cardone
- WhiteBoard Finance
- Ryan Scribner
- Andrei Jikh
Read These Books
You can find many books filled with financial advice to help you become financially literate. Here are the top 14 books about personal finance.
- Cary Siegel's "Why Didn't They Teach Me This in School?" (CreateSpace Independent Publishing Platform, $11.99)
- Robert T. Kiyosaki's "Rich Dad Poor Dad" (Plata Publishing, $17.95)
- Erin Lowry’s “Broke Millennial” (TarcherPerigee, $14.40)
- Dave Ramsey's "The Total Money Makeover" (Thomas Nelson, $11.88)
- David Bach's "The Automatic Millionaire" (Crown, $10.19)
- Vicki Robin's "Your Money or Your Life" (Penguin Books, $11.95)
- Scott Trench's "Set for Life" (BiggerPockets, $15.99)
- Morgan Housel's "The Psychology of Money" (Harriman House, $16.99)
- David Bach's "Smart Women Finish Rich" (Currency, $14.89)
- William D. Danko and Thomas J. Stanley's "The Millionaire Next Door" (Taylor Trade Publishing, $9.79)
- Barbara Stanny's "Secrets of Six-Figure Women" (Harper Business, $14.39)
- John C. Bogle's "The Little Book of Common Sense Investing" (Wiley, $13.99)
- John Bogle, Taylor Larimore, Michael LeBoeuf, and Mel Lindauer's "The Bogleheads' Guide to Investing" (Wiley, $15.80)
- J L Collins' "The Simple Path to Wealth" (CreateSpace Independent Publishing Platform, $14)
Get Financial Counseling
Most financial counseling services are free, confidential, and non-judgmental. Meet with a certified financial advisor to get expert help, whether planning for retirement, creating a personal budget, or paying off debts. The financial advisor will understand your financial position and consider your options, as well as their advantages and disadvantages. Many financial advisors specialize in different areas and have varying experiences and financial literacy skills.
What You Can Do Right Now to Get Started
Financial literacy is achievable, and its real purpose is to help you live your life the way you want to. Financial literacy can help you to make better and more informed decisions regarding your finances. Here are steps you can take immediately.
Start a Small Emergency Fund
To start investing in your emergency fund, set aside a reasonable amount and slowly add to it regularly. This will get you started and protect you from any unpleasant surprises that may come along.
Start Paying Down Your Debt
A debt of any kind slows your financial progress. There are two initial ways to pay back your debt: the snowball method and the avalanche method. The snowball method requires you to list all the debts you currently owe and arrange them in order from the least expensive to the most. Once you have your debts in order, you start by paying off the smallest debt. Then, once you have paid back your smallest loan, you move to the next one on the list.
If you want to pay back your loans using the avalanche method, make a list of all the debts you currently owe and arrange them in order from the highest interest rate to the lowest. Once you have them in order, start paying off the debts with the highest interest rates. The method you choose is up to you; be sure that you will stick to it and fulfill the payments.
Pay Off Your Mortgage Early On
For most people, a mortgage is the costliest expense. By eliminating this monthly expense, you may be able to save more, invest more, and pay off more debt. In addition, making higher monthly payments to your mortgage can increase the speed at which it is paid off.
Invest a Small Percentage of Your Income
It is never too late or too early to start investing for your retirement. Start setting aside a small percentage of your income, preferably 15%, and invest in a retirement account of your choice. Use a 401k program your employer offers, especially if they match your payments. You can also opt for an IRA or Roth IRA account. Investing in your retirement account is ideal because it can ensure that you will beat inflation over the years.
Sum up
There are countless retirement savings, investment, and wealth-building options to choose from nowadays. In addition, individuals can take advantage of free online finance classes, financial advice books, videos, or advice to improve their financial literacy.
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