5 Components of Financial Literacy
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Financial Literacy covers how to manage financial resources effectively across an entire lifetime.
While that might seem vague and overwhelming, understanding the five components of financial literacy is a little more manageable and provides a place to start. |
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Earn: Understand your paycheck
Know how much money you make. Sounds simple. But if your check changes month to month, based on hours or tips, it can be difficult to predict.
Make an informed estimation based on a typical week.
Once you know this, you can create your budget as accurately as possible.
Make an informed estimation based on a typical week.
Once you know this, you can create your budget as accurately as possible.
Spend: Create a personal budget
Budgeting. It's repeated a lot on this site; personal budgets can help you stay on track and know how much spending money you have and where your paycheck goes each month.
Break everything down into categories. Need help starting a budget? Try the 50/30/20 rule.
50% of your budget goes to basic necessities (rent, utilities, car payments/ transportation, groceries, etc.)
30% for broad "non essential" categories or things that might change. This includes children's school expenses, eating out, and other "wants".
20% for savings/paying off debt. This money can go toward paying off credit cards, student loans, creating an emergency fund, or simply adding to savings.
While the 50/30/20 method might not work for everyone, the idea is simple-- the largest category is for your most basic necessities, what you cannot live without, your next category is for things that you enjoy, but do not always need, and lastly, savings and debt. The percentages can be adjusted to better fit your life, say 60/20/20 or 50/20/30 to maximize debt payoff and savings.
Break everything down into categories. Need help starting a budget? Try the 50/30/20 rule.
50% of your budget goes to basic necessities (rent, utilities, car payments/ transportation, groceries, etc.)
30% for broad "non essential" categories or things that might change. This includes children's school expenses, eating out, and other "wants".
20% for savings/paying off debt. This money can go toward paying off credit cards, student loans, creating an emergency fund, or simply adding to savings.
While the 50/30/20 method might not work for everyone, the idea is simple-- the largest category is for your most basic necessities, what you cannot live without, your next category is for things that you enjoy, but do not always need, and lastly, savings and debt. The percentages can be adjusted to better fit your life, say 60/20/20 or 50/20/30 to maximize debt payoff and savings.
Save: Determine your financial goals
There are many categories of savings, saving for an emergency fund, retirement, big purchases, vacations, or paying off debt.
The first step is knowing what categories are important. From there, drill down and see how much money you have for savings each month and how much needs to go to which categories.
If you are paying off debt, that should come first. Paying off loans on time (or ahead of schedule) can save thousands in interest.
The first step is knowing what categories are important. From there, drill down and see how much money you have for savings each month and how much needs to go to which categories.
If you are paying off debt, that should come first. Paying off loans on time (or ahead of schedule) can save thousands in interest.
Borrow: Credit cards, loans, and your credit score
At some point you may have to borrow money to cover a large expense like a home or car; or money to go back to school.
Borrowing isn’t necessarily a bad thing—as long as you know how to compare loans and maintain a healthy credit score.
In general, the higher your credit score, the less interest you'll be charged. That's why building healthy credit is one of the most important steps in becoming financially literate.
Borrowing isn’t necessarily a bad thing—as long as you know how to compare loans and maintain a healthy credit score.
In general, the higher your credit score, the less interest you'll be charged. That's why building healthy credit is one of the most important steps in becoming financially literate.
Protect: Prevent fraud
The easiest way to protect yourself from fraud is to regularly check your bank accounts and review your bank statements.
Do not enter your banking or credit/bank card information on websites that are not safe, you do not recognize, or are not protected with "https". For more information on shopping online and fraud protection, check our Internet Safety Class through CHATT.
Do not enter your banking or credit/bank card information on websites that are not safe, you do not recognize, or are not protected with "https". For more information on shopping online and fraud protection, check our Internet Safety Class through CHATT.
