Being financially literate is where we all start on the Financial Wellness Roadmap.
Stage 1: Financial Literacy
Financial literacy is understanding the basics of personal finance, banking terms, and how money works. You’re able to recognize the products, services, and tools needed to manage your financial 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 score? why contribute to a 401(k) plan?
- 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 is a broad topic that includes banking basics and financial concepts to tactical money skills such as budgeting and credit use.
What it means to be financial literate
It simply means you’re financially knowledgeable. Being financially literate is understanding the value of cash, how money works, where to find products and services, comprehend interest, and the cost of borrowing. You are able to follow financial conversations and ask questions relevant to your finances.
Are You Financially Literate?
Read these questions and think through them:
- Do you understand compound interest?
- Do you know how to use a checking account and debit card?
- Do you know how to read bank statements?
- Do you know about credit?
- Do you understand the cost of borrowing?
Financial Literacy Gives You Money Management Knowledge
It’s important to understand basic banking terms, products, and services. For the most part, you’ll be using basic banking products for your everyday financial transactions.
- Basics of Banking: What you need to know
- Pay Yourself First: A Personal Finance Golden Rule
Income and Cash Flow
Everything starts with the money you’ve earned. It requires the ability to read your pay stubs and identify the money that is deposited and withdraw from your account.
A budget is a spending plan that allocates money to your bills, expenses, savings, retirement, and other financial goals. It’s a tool that is often misunderstood. A budget is your blueprint. It will help you tell your money where to go so you don’t wonder where it went.
To be financially literate means a firm understanding of the importance of saving money for emergencies and planned purchases.
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 the role of credit as leverage to assist in touch economic times and to grow assets.
Investing and Retirement
In this stage, you may not be investing money or thinking about your retirement. However, you’re well aware of that wealth is created through investing. And that retirement, no matter what age we’re in, can be right around the corner. Financial literacy informs you about the power of time and how investing money sooner can mean more money later.
Understanding money is a good start but being financially literate means you apply your knowledge to manage your money. It also means you know the importance of consistent financial education due to the ever-changing financial landscape.
Next Stage: Financial Capability