A 2013 survey by Statista revealed that most millennials in the United States did not understand financial literacy. The results of this survey showed that 70% of millennials wished they could have learned basic investing in school, 60% wished they could have learned how to save for retirement, and 50% wished for household budgeting.
It is normal to face certain financial challenges, but what makes it easier for you to overcome is the knowledge of financial planning you have. In this article, we discuss financial literacy, five key components of this major term, and how to improve your financial literacy.
What is Financial Literacy?
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. The Nigerian Stock Exchange is also heavily interested in financial literacy as it has an array of financial literacy programs that are aimed at building a generation that is competent and confident in choosing and utilizing financial products and services to raise their welfare.
Limited or lack of financial knowledge or literacy can make it difficult for individuals to make certain financial decisions including; retirement plans, bank accounts, and which loans to take.
To help people with limited or lack of financial knowledge, you need to take some courses in financial studies. However, before this, here are a few points to help you. The Financial Literacy and Education Commission listed five key components of financial literacy; earn, spend, save and interest, borrow and protect.
1. Earn: Understanding Your Paycheck
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. Spend: Creating a Personal Budget
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: Determining your Financial Goals
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. Borrow: Credit cards, Loans, and your Credit Score
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. The Annual Percentage Rate (APR) is the metric to compare loans and credit scores.
5. Protect: Preventing Fraud and Buying Insurance
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.
How to Assess your Financial Literacy
After you’ve read the above components, you might want to assess your level of financial knowledge. You can easily do that by asking yourself the following questions:
- Do you know how to create a personal budget?
- How often do I review my bank statement?
- Do you have an emergency fund that covers at least three months of basic living expenses?
- Do you know your credit score and how to improve it?
How to Improve your Financial Literacy
Whether you answered yes or no to most of these questions, it is important to improve your financial literacy by doing the following things:
- Create a personal monthly budget
- Start an emergency fund
- Make retirement plans
- Determine your credit score and how to improve it
- Make plans to pay up your debts