Taking control of your money: steps to boost your financial literacy

Developing financial literacy helps you prepare for the future and any unexpected financial challenges that come with it. Even just becoming proficient in the basics, such as how to track your expenses or how to determine how much to save , will help you reach your goals and help keep you from falling into debt. 

Key concepts of financial literacy

Simply put, financial literacy is the ability to understand how money works. It means being knowledgeable enough to make informed money management decisions and achieve long-term financial goals. This involves skills such as budgeting, saving, managing credit and avoiding debt, which all work to raise your credit score and set you up for your future.  

Budgeting and saving are at the forefront of financial literacy. Creating a budget, and sticking to it, ensures you know how much money you’re making, how much you’re spending, and how you’re spending it. Monitoring your income and expenses helps you stay on track financially, and shows you how much you can afford to put in savings. 

The more you understand how credit and debt work, the easier you’ll find it to stay afloat. High debt and a bad credit score can lower your chances of getting approved for a loan and increase the amount of interest you’re forced to pay. A credit utilization ratio, the amount of your available credit that you’re using, is one concept that will help you. Maintaining a lower percentage will leadto a stronger credit score and   is less detrimental to your financial health. 

Practical steps to improve your financial knowledge

With the internet at your fingertips, utilizing online resources is the easiest way to gain financial literacy. Rather than books, these online materials often come in less intimidating and complicated forms. You can find material with plain, conversational writing that gives you the answers without the confusing language that often accompanies it.

Attending workshops and seminars—some of which are free—can help you in many realms, teaching you anything from the basics of finance to the niche aspects. You can even join financial literacy groups through social media, where you’ll be connected with like-minded people that have the same questions as you. This can help you build a community, find mentors, stay motivated and learn from others’ mistakes. 

You can also meet one-on-one with a financial professional. Learning about your finances can be difficult and overwhelming, especially when trying to navigate complex topics like budgeting, credit management, and distributing capital across opportunities. A professional can give specific answers to your questions and offer solutions tailored to your needs. 

Budgeting: your first step to financial wellness

Creating a realistic budget is crucial to avoid overspending and falling into debt. Today, you can even build one with an online worksheet or app. Though budgets vary for each person and business, a commonly used method is the 50/30/20 rule. Following this model, you would allocate 50% of your income to needs, 30% to wants and 20% to savings or paying off debt. 

The first step to creating a budget is tracking your income and expenses. Lay out how much you’re making, including all your income, insurance payouts and earnings generated , then list your routine expenses, such as your rent or mortgage rate, student loans, insurance payments, groceries and utilities. Comparing these amounts will show you how much money you have left to put in savings or towards non-necessary purchases. 

It’s important to remember to adjust your budget to meet your financial goals. As you grow older and reach different stages of your life, it’s normal for your financial goals to alter as well. When you make a big life change, such as buying a home, changing jobs or moving cross-country, you should be sure to rethink your budget. You may find you need to allocate more money towards a new mortgage, or that you have extra funds to put towards a new car. 

Setting and achieving financial goals

When laying out your financial plans, you should first identify what you’re saving for. Short-term goals are typically reached within one year and include immediate needs like saving for a vacation or repaying debt. Medium-term goals look ahead to up to five years and involve things like saving for a car or renovating your home. Long-term goals are often set for over five years and focus on objectives like buying a home or retiring at a certain age. Knowing what you’re aiming for will tell you how much you need to save, what your timeline is and what tools you should use to reach your goals. 

After you assess your financial standing and determine your financial goals, it will be far easier to create an action plan for saving and generating a financial return. If you follow the 50/30/20 rule, you’ll be saving 20% of your paychecks and any additional income. After determining the amount you’re going to save, it’s time to calculate the amount you can afford to allocate towards financial growth opportunities . If you’re offered a 401(k) through your job, it’s wise to contribute enough to receive the full employer match, which would give you a 100% return. For allocating funds through other opportunities outside of your work, you should remember to diversify your assets, spreading them out between stocks, bonds and cash, in order to lower your risk of loss. 

Equally as important is an emergency fund that’s separate from your savings. You should aim to have enough money to cover three to six months’ worth of expenses in your emergency fund, which can save you in times of unexpected occurrences such as medical bills, car issues or job loss. Dedicating a portion of your income to this cause ensures you won’t be forced into debt.