Not many people are brought up in an environment where finances are discussed openly and honestly, and few schools offer a financial literacy course to students at any stage of their educational journey. In recent years, however, the importance of financial literacy has grown exponentially, with employers, creditors, and consumers alike realizing that having an understanding of how money works is critical to ongoing success in life. The increased attention paid to financial know-how has sparked a national dialogue around personal finance and the creation of financial literacy month each April.
Many individuals as adults are overwhelmed by the thought of personal finance, whether that is due to little to no education provided throughout a lifetime or experiencing a less than ideal situation with a lender or other creditor. But having the right knowledge about money can be empowering no matter what stage of life you are in. If you want to improve your understanding of money and personal finance, there is no better time than the present. Here are a few easy steps you can take to ramp up your money know-how for this year’s financial literacy month.
A recent poll revealed that 37% of Americans put saving at the bottom of their financial priority list, below paying off debt, getting a raise, or reducing their monthly spending. Despite most individuals knowing that having a liquid savings account is an important component of being financially stable, most are unaware of the best options for savings and the easiest methods to get started. The first step is knowing how much you need or want to save. If you know there is a major purchase you want to make shortly, determine how much it will cost and then break that amount down to manageable chunks to set aside every time you get paid. The same can be done when you’re attempting to build an emergency fund; know what you’re aiming for based on your expenses or income. Smaller goals are almost always easier to achieve than larger objectives, so this step sets you up for success.
Savings should be viewed as a place to go in the event a large bill, or a big purchase comes into play. Because of its short-term nature, funds set aside for savings should be held in an account that is easy to access and liquid, meaning you can transfer or otherwise access your money in a short period. Savings accounts are available through traditional financial institutions, like banks and credit unions, as well as online providers such as Ally Bank. In today’s technology-infused world, several options for savings exist that follow the out-of-sight, out-of-mind concept, making it easy to keep your spending hands away from funds earmarked for savings.
Another way to boost your financial know-how this financial literacy month is to understand how credit works and how it impacts your long-term financial life. Your credit score and report comprise the information lenders, employers, and even insurance companies use as the basis to offer or deny new credit. Poor credit due to financial mishaps, like a foreclosure or bankruptcy, a missed credit card payment, or an account that found its way to collections, work against you in the long run. When your credit report is bogged down with negative or incorrection information, your lowered credit score makes you an unfit borrower in the eyes of new creditors. That results in declined credit applications, lost job opportunities, or high interest rates on new accounts. To better understand your credit situation, be diligent about checking your credit each year, and work toward improving your credit report and score by removing errors and resolving negative items.
Financial literacy is not simply about gaining knowledge of savings and how credit works. Being smart about your personal finances also means understanding how to structure your financial life to make the most of the resources you have. For some, thinking in terms of financial buckets helps with this tricky step. To keep it simple, imagine you have three major financial buckets: a long-term, a mid-term, and a short-term.
Long-term buckets are focused on retirement accounts, including traditional or ROTH IRAs, employer-sponsored accounts like a 401(k), or a pension, while mid-term buckets encompass the goals you are striving to achieve in the next five to 15 years. The short-term bucket represents your emergency fund and any major purchases you plan to make in the next one to five years. Understanding each of these buckets allows you to explore what vehicles can be used for each. For example, knowing retirement is years away opens the door for investing within that bucket. The same may be applied to a mid-term bucket, albeit at a lower level of risk. Short-term buckets are, as previously mentioned, safer accounts since you know you’ll be using those funds in the near-term.
Thinking about your financial picture with the bucket mentality often helps in creating achievable goals that you can contribute toward each pay period or month. You know each bucket needs to be filled up, but that doesn’t necessarily mean at the same rate or at the same time. Think about your specific priorities and allocate your pennies (or dollars) to each bucket accordingly.
One of the smartest steps you can take to improve your level of financial literacy this month is determining what team members you need to help you achieve your goals. It is important to note that not everyone needs the same team at the same time. For some, the financial dream team includes a financial planner or investment advisor (to further that bucket discussion), and for others, a reputable credit repair company or credit counselor may be the first addition to the team. Know where you stand with your current financial circumstances, and prioritize the help you may need. Asking friends or family members for a referral to the right professional, or a simple search online are both sound ways to ensure you’re getting the high-quality help most appropriate for your current needs. If you prefer to do everything on your own you can begin with a free tool such as Personal Capital to help you get a grip on your finances and start setting goals.
Gaining a better understanding of the ins and outs of money management does not have to be an overwhelming process. Start by reviewing your unique circumstances and work step by step to improve your level of financial literacy based on where you are now.
Get hot tips, exclusive deals and the latest news sent directly to you.