Financial Literacy: What It Is and How It Can Improve Your Life (2024)

Financial literacy is the ability to understand financial skills such as budgeting, investing, and personal financial management.

It’s important today more than ever before! Because it helps you to plan for the future, make better financial decisions, manage your money, and reduce your debt. It also helps you to avoid making poor financial decisions and ensure prolonged financial stability.

In this article, you will learn the skills needed to make smart financial and investing decisions. Educating yourself on financial literacy is a must to make informed decisions and avoid unnecessary levels of debt.

Personal Finance Basics

Personal finance is the process of managing your financial situation. It includes saving, investing, budgeting, and managing debt.

Learning personal finance is essential to survive financially. You need to see your whole financial position to manage your money more effectively. How much money do you make? How much money do you spend? How much money should you invest? You need to ask these basic questions to yourself in order to examine your current financial situation.

Understanding the basics of personal finance helps you to make intelligent investments, and achieve your financial goals. Furthermore, it has a huge impact on many different areas of your life like buying a house, investment success, living comfortably, etc.

To summarize, personal finance will enable you to spend wisely, invest intelligently, manage your wealth, and save for retirement.

How to Create a Budget

Creating a budget is one of the most important ways to control your money. You can’t improve your financial health if you don’t track your income and expenses. You need to set clear financial goals, and develop a financial plan for careful record keeping.

Here’s how to create a budget in seven steps.

1. Create a budget in an Excel sheet: You need to check where your money comes from and where it goes.
2. Calculate your income: You need to state how much money you make each month. This includes your normal paychecks and any extra money you earn through a side hustle or freelance work.
3. Calculate your expenses: You need to list your monthly expenses like rent, utilities, loans, etc.
4. Calculate the difference between your income and expenses: When you subtract expenses from income, this number should be bigger than zero.
5. Label fixed and variable expenses: Fixed expenses are bills you can’t avoid such as rent, and utilities. Variable expenses are bills you can be more flexible like gym membership, travel plans, etc.
6. Set financial goals: You need to identify what you’re saving for and how much you need to save.
7. Review your progress: At the end of each month, you need to review your progress, and reevaluate your budget.

Ultimately, you need to have a record keeping system to track expenses and know how much you’re spending and where you’re spending it. If you don’t know where and how much you’re spending, you don’t have control of your finances.

How to Start Investing

To get started investing, you should determine a strategy based on the amount you will invest. You can begin investing with $100 or $1000. The amount of money you’ll start with is not important. It’s significant to be financially ready to invest. If you’re ready to start investing, you need to figure out how much money you should invest, what assets you should invest, and what your risk tolerance is.

Here are five steps to start investing:

1. Start investing early and consistently: Investing early and consistently when you’re young is one of the best ways to take full advantage of returns on your money. Your investment returns start earning their own return thanks to compound earnings. Also, when you build wealth systematically through investments, it’ll improve your spending habits.
2. Choose your investments by diversifying your portfolio: You need to find investments that fit your financial goals and choose the different types of investments by diversifying your portfolio. Remember that you should never put all your investments in one security.
3. Decide how much to invest: When you choose your investments, you need to decide the amount of money you’ll invest in each investment type. How much you’ll put in depends on your financial goal.
4. Measure your risk tolerance: Different people have different tolerances for risk. You need to measure your risk tolerance because it is one of the most important factors that affects which assets you’ll add to your portfolio. If you don’t worry about short term downs in your investment, you probably have higher risk tolerance. If you worry with short term downs, you may have a lower risk tolerance.
5. Build your portfolio: Once you start investing, choose your investments, decidehow much to invest, and measure your risk tolerance, it is finally time to build your portfolio. While building your portfolio, select different combinations of assets that are best suited to help you reach your financial goals. Some common investments to include in your portfolio are stocks, bonds, short term certificates of deposit accounts, mutual funds, exchange traded funds, commodities, real estate, etc.

To summarize, the purpose of investment is to accumulate wealth to reach your financial goals (buying a house, having sufficient savings for retirement, etc) And always remember that investing is a long term process that you’ll gather in the greatest profits by consistently investing over time.

The Bottom Line

Financial literacy is understanding of concepts like saving, investing, budgeting, managing debt, and retirement planning that helps you control your financial well-being, and live a better life.

It is an ongoing process that teaches you essential skills you need for a more financially secure life. Ultimately, it helps you to build your wealth, take control of your financial well-being, and improves your life.