Stage 1 on the financial wellness roadmap is financial literacy.
Financial knowledge supports our journey to achieve our life goals. It begins with financial education and heightened literacy.
What is Financial Literacy?
Financial literacy is understanding personal finance basics and recognizing the products, services, and tools needed to manage your economic life. Becoming financially literate is an ongoing process, but at this stage, you’ve gained enough knowledge and awareness to help you manage money and set goals.
At stage 1, you could answer questions like: how does compound interest work? What is a checking account? Do you know the difference between a credit report and a score? Why contribute to a 401(k) plan?
Financial Literacy Key Features
- understanding money and banking terms;
- budgeting skill;
- credit knowledge;
- investing and retirement basics.
To be financially literate, you must have a firm grasp of personal finance fundamentals that help you manage money and make sound financial decisions. Financial literacy skills include banking basics and tactical money skills such as budgeting, credit, debt management, spending habits, and more.
Why Improve Financial Literacy?
Your understanding of financial concepts informs your decision-making. Financial education helps you understand the value of cash, how money works, where to find products and services, comprehending interest, credit cards, student loans, and the cost of borrowing. You can follow financial conversations and ask questions relevant to your finances.
Improving financial literacy helps you gain the financial skills that can support your peace of mind.
Are you financially literate? Read these questions and think them through:
- Do you understand compound interest?
- Do you know how to use a checking account and debit card?
- Know how to read bank statements?
- Do you know about credit history?
- Understand the cost of credit card debt
How to Become Financially Literate
Being financially literate means having the confidence to save, invest and manage money efficiently. It includes budgeting, getting out of debt, insurance, investments, real estate, college and retirement planning, tax and estate planning. Your knowledge of money matters can build a solid financial future.
We all start in different places in our personal finance journey. But, the following are essential elements to progress forward in your financial wellness journey.
1. Understand banking basics
It’s essential to understand basic banking terms, financial products, and services. For the most part, you’ll be using actual banking products for everyday financial transactions.
2. Know income and cash flow
Everything starts with the money you’ve earned. It requires the ability to read your pay stubs and identify the funds deposited and withdrawn from your account. Cash flow helps you understand your discretionary spending ability.
3. Importance of budgeting
A budget is a spending plan that allocates money to your bills, expenses, savings, retirement, and other financial goals. A budget is your blueprint. It will help you tell your money where to go, so you don’t wonder where it went. You can plan for future purposes.
4. Why saving matters
To be financially literate means a firm understanding of the importance of saving money for emergencies and planned purchases.
5. The rules of credit
It takes time and effort to establish, build, and maintain good credit. Credit is a tool to help you make purchases before you have money available. Credit isn’t necessarily bad, but it can lead to long-term debt. Being credit literate means, you understand things like the factors that impact a credit score.
6. Investing basics
In this stage, you may not be investing money or thinking about your retirement. However, your well-aware financial future is supported by investing. Financial literacy informs you about the power of time and how investing money sooner can mean more money later.
7. Retirement savings
Understanding financial management requires contributing to your retirement. And that retirement, no matter what age we’re in, can be right around the corner.
Continue improving your financial literacy
Financial education helps you understand the score of your financial situation. The knowledge gained is a solid foundation for financial stability and reaching financial freedom.
It’s about gaining knowledge to help you in your financial journey. However, we don’t even know what we’re missing until we’re exposed to it most of the time. So exposure to higher levels of financial planning is essential. What can you do to improve your financial literacy?
- Continue reading our financial wellness articles.
- Read books because they continue to be the best source to understand a concept deeply. Check our Amazon money book list here.
- Listen to podcasts on money. We recommend Stacking Benjamins for their financial edutainment.
- Watch YouTube videos.
- Take online courses (like our free 7-day financial wellness email course)
Now that you’ve read through stage 1 of the roadmap, you’re now ready to learn how to be financially capable.