Financial literacy is ability to use different financial skills effectively and a good understanding of budgeting, personal financial management, and investing.

According to the FINRA (Financial Industry Regulatory Authority), approximately 66% of America’s population is financially illiterate.

It allows you to prepare better for any roadblocks that you may come across. It’s vital in society for daily matters involving finances such as mortgages, insurance, and student loans. https://myfin.us/ is one of the most reliable sources of financial literacy information.

What does it mean to be Financially Literate?

According to the Federal Financial Literacy and Education Commission established by Congress in 2003, there are five fundamental financial literacy principles.

Being financially literate, according to this commission, means understanding the following components:

How much you earn, including your pay and benefits
How to save and invest; either by creating an emergency fund or setting aside funds for short and long-term goals
How to protect your money when procuring insurance and to know how to detect and avoid fraud
How to spend wisely through comparison shopping and budgeting
How to select the lowest interest rate when borrowing money and how to keep your credit strong and healthy.

Why is it Important?

Financial literacy is essential because it equips you with the knowledge and skills required to manage money effectively. It acts as a foundation for all your financial decisions.

At the moment, nearly half of Americans do not have enough money to retire comfortably. Approximately 40% of people in the US cannot afford a $400 emergency expense.

Besides equipping you with skills and knowledge:

It helps you understand how to budget. A budget helps pay for expenses, save, and even pay off one’s debt. The first step to making a budget is understanding how much you earn and how to distribute it effectively.
It’s helpful in understanding and managing debt. When you become financially literate, you learn the importance of seeking out loans with lower interest rates. You also know the best methods to help you get out of debt through financial products such as debt consolidation loans.
It teaches the importance of having an emergency fund and how to use it. An emergency fund is an excellent way of preventing debt. An emergency fund is a savings account where you draw funds when faced with unexpected expenses.
It helps you prepare for retirement by teaching you how to save money through emergency savings accounts or retirement funds.
It educates you on how to invest and create income streams. Creating multiple streams of income gives you the confidence to help you navigate through financial crises.
It’s an opportunity to boost your country’s economy through investing in stocks. When you invest a certain amount in stores, you, in turn, help the company you’ve invested in creating more jobs. This means a better employment rate and the steady progression of your country.

How can I become financially literate?

Here are some action steps you can take to help you in financial literacy:

1. Start an emergency fund

$1000 is a perfect amount to start with; it will keep you from getting thrown off track when faced with challenging financial events. You can make the amount larger as time goes by.

2. Pay off your debts

Debt slows down financial progression, leaving you frustrated and stagnated. Begin by paying off the small debts and work your way to the larger ones.

3. Invest your income for retirement

it’s never too early to start planning for retirement. A great way to start is by investing 15% of your income in tax-advantaged retirement savings plans such as 401(k) and Roth IRA. It will help you beat inflation and still have enough money to channel towards paying expenses such as mortgages.

4. Save for college

The best methods for saving college are Education Savings Accounts (ESAs) and 529 plans.

5. Pay off your mortgage early

Monthly housing payments are one of the most significant expenses for most Americans.

FAQs

What is a 401k?

A 401k is a retirement plan offered by an employer that allows you to take a certain amount and put it aside for retirement.

What is a 529 plan?

A 529 plan is a savings plan whose aim is to encourage people to save for their future education costs. They are of two types: education savings plans and prepaid tuition plans.