The United States Treasury’s Financial Literacy and Education Commission defines financial literacy as the ability to use knowledge and skills to manage financial resources effectively for a lifeline of financial well-being. Your financial knowledge or literacy can make it easy for you to make certain financial decisions including; retirement plans, bank accounts, and which loans to take. The Financial Literacy and Education Commission listed five key components of financial literacy; earn, spend, save and interest, borrow and protect.
1. Earn
The first thing to note before you can learn about the other concepts; spending, saving, and investing is how much money you make. If you work at a full-time job and earn the same amount monthly for a period, just look at your paychecks to check for your gross and net income. Identifying your gross and net income first helps you spend responsibly with a budget.
2. Spending
A personal budget is just a plan to coordinate and monitor your income and expenses. Aside from this monitoring function, it is the most useful tool to achieve your financial goals. Tracking your income and expenses is the first thing to do before creating a budget. You can use the popular 50|30|20 budgeting rules, or create a unique one for yourself.
3. Save
The importance of saving some part of your income cannot be overemphasized. However, it is hard to spend less than you earn if there are no particular financial goals to guide you. The type of financial goals you set depends on your situation:
- Saving for an emergency fund
- Planning for retirement
- Saving for a big purchase
- Paying off personal debts
4. Borrowing
At times, in case of some financial challenges, your savings might not be able to solve the large expenses like buying a home or car. These expenses might need you to borrow, however, the main thing here is to compare loans and maintain a healthy score.
5. Protect
After you have followed the above steps to create a solid saving, budget, and investment strategy, the next thing is to protect your funds. This includes reviewing your bank account, and credit card statement, and keeping your password safe among others to prevent scams and identity theft.