Financial literacy is an important life skill that can assist with making sound decisions when managing money. It is critical to learning how to save, borrow, invest, and protect money, while developing financial habits that support your lifestyle and goals; however, not everyone has this necessary knowledge. A 2022 TIAA Institute study, on Americans’ financial literacy found U.S. adults could only correctly answer 50% of the index questions on average.

The same study also found evidence that better financial literacy generally translates to greater financial well-being: “For example, compared to those with very high levels of financial literacy, those with very low levels are 6 times more likely to have difficulty making ends meet, 3 times more likely to be debt constrained, 3 times more likely to be unable to cope with a $2,000 financial shock, 5 times more likely to lack emergency savings sufficient to cover one month of living expenses, and 4 times more likely to spend ten hours or more per week dealing with personal finance issues.” Not only that, according to CNBC, “38% of individuals in a recent survey said their lack of financial literacy cost them at least $500 in 2022, including 15% who said it set them back by $10,000 or more.”

The data from the research reflects a lack of financial literacy can potentially cost you money. With so much information about financial literacy, it can be challenging to know where to begin. In this article, we will explore seven steps you can take to improve your financial literacy and make wise decisions about your money.

What Does Financial Literacy Mean?

Financial literacy is the ability to understand, use, and make informed decisions about personal finance topics, such as budgeting, saving, taxes, investing, and credit/debt management. Financial literacy is an important skill in today’s world, where financial decisions have a long-term impact on our financial health.

Step 1: Find Trusted Resources to Expand Your Knowledge

This could involve subscribing to financial newsletters, listening to financial podcasts, or reading personal finance book. These resources allow you to explore a variety of topics and gain insight into expert opinions and lessons, current news, and personal finance tips. Podcasts are a great way to passively soak up knowledge while you go about your life—cleaning the house, running errands, cooking dinner, or walking the dog. U.S. News put together a comprehensive list of personal finance podcasts. If you are more of a reader, Insider has a list of their top personal books on personal finance for 2023. There is no shortage of financial resources available, but this plethora of knowledge also comes with the risk of misinformation. Make sure that what you consume is from a reputable source that provides objective, unbiased, and well-researched guidance.

Step 2: Make a Budget

Creating a plan for how you will use your income each month will help you track your expenses, ensure that you are spending within your means, and avoid trying to keep up with the Jones (which can quickly derail you from your financial goals). A budget can help you understand where your money is going and help you set goals for how you want to use your money. When it comes to budgeting, NerdWallet recommends trying the 50/30/20 rule, where you allocate:

1. 50% of your income for needs
2. 30% of your income for wants
3. 20% of your income for savings and debt repayment

As an example, if you gross a monthly salary of $4,000, up to $2,000 can go toward necessities such as food, rent/mortgage, utilities, and so forth; $1,200 can go toward wants, which are not a necessity; and the remaining $800 can go toward savings, such as a retirement or investment account, or an emergency savings account, or to pay off whatever debt you may have.

Step 3: Understand Credit and Manage Your Debt

Another step to improving your financial literacy is understanding credit – both how it works, and what your credit score is and why. Credit is a tool that can be used to help you make purchases and build a good credit score, but it can also be dangerous if misused. Unfortunately, a lot of people are struggling with credit card debt. According to the Federal Reserve Bank of New York, in the fourth quarter of 2022, “Credit card balances increased by $61 billion to reach $986 billion, surpassing the pre-pandemic high of $927 billion”—or about $5,589 per household according to Experian. To improve your financial literacy, it is essential to understand how credit works and how it affects your finances.

Having bad credit can prevent you from qualifying for loans, whether for a new car purchase or a house mortgage. To build excellent credit, we recommend paying off your credit card debt in full every month while reaping the benefits of using credit – whether racking up mileage points or getting cash back. Most credit card companies offer anywhere from 1–5% cash back on qualifying purchases. Be sure to check with your credit card provider about their rules and the perks available. Also, check your credit score and full report frequently, as this will help you identify areas for improvement, and ensure your credit report is accurate.

Step 4: Learn About Investing

Investing potentially can help you build wealth and reach long-term financial goals. We recommend starting with learning the basics of investing, such as different types of investments diversifying your portfolio. As an investor, there are many asset classes to choose from, e.g., real estate, mutual funds, exchange-traded funds (ETFs), stocks, or bonds. Knowing how these different investment vehicles work and how they may fit into your overall financial goals is essential.

Step 5: Know Your Insurance

Insurance is a tool that can help protect you from financial risk and liability – whether for your home, car, health, or whatever that needs to be insured. According to the SCDOI, “Many insureds purchase a policy without understanding what is covered, the exclusions that take away coverage, and the conditions that must be met in order for coverage to apply when a loss occurs.” Know the details of your policy and different features of each type of insurance you may have.

Typically, most insurance contracts have four basic parts:

1. Declaration page – outlines the coverage’s details, including the liability limits, coverage type, coverage period, and premium amount. It also outlines any exclusions or special provisions that may apply.
2. Insuring agreement – specifies the coverage provided and the conditions under which the insurance company will pay a claim. It is the heart of the insurance policy, as it outlines the insurer’s promise to pay for losses or damages that are covered by the policy.
3. Exclusions – provisions that specifically state what is not covered or what is excluded from coverage. Exclusions limit the scope of coverage provided by the policy and are generally listed in the policy’s section on coverage limits and exclusions.
4. Conditions – rules and regulations that the insured must follow to receive coverage and benefits from the policy.

Step 6: Have a Savings Plan

Saving money can feel like an uphill battle. With rising living costs, it may be hard to set aside extra funds for the future. Yet, having a savings plan is an essential part on the path to achieving your financial goals.

To start, determine how much of your income you can commit to saving. Consider creating a budget to identify areas in which you can cut back. Once you have a savings target, decide where to save your money. An option aside from a traditional savings account is a high-yield savings account, which offers higher interest rates than traditional savings accounts. Per CNBC, “High-yield savings accounts stand out from traditional savings accounts in that they reward you with a higher interest rate, allowing your money to grow even faster as it sits in your account.” To explore if a high-yield savings account is an appropriate savings vehicle for you, contact your bank.

Next, create an automated savings plan. A great way to ensure you save consistently is to set up automatic transfers from your checking account to your savings account, so you do not have to remember to transfer funds each month manually.

Like all goals, it may be best to set measurable goals and rewards for yourself, such as a treat from your favorite store after you save a certain amount of money in a predetermined timeframe. By setting targets, allocating funds, and setting up automated transfers, you are more likely to build up your savings and make progress toward reaching your financial goals!

7. Talk to a Financial Professional

A financial professional can act as an educator and advocate for you as you expand your financial knowledge. They can answer questions, from simple to complex, work with you to evaluate your current financial situation, and help you plan to meet your financial goals and needs.

Takeaways

Financial literacy is an important life skill that can help you make more informed decisions about your money. To become financially literate, it is vital to understand budgeting, credit, investing, insurance, savings plans, and how these components work together to give you a better footing when it comes to your finances. With increased financial literacy, you can better manage your money and reach your financial goals.

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Standard Disclosure

This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated. The information contained within is believed to be from reliable sources. However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals.

Past performance is no guarantee of future results, and any expected returns or hypothetical projections may not reflect actual future performance or outcomes. All investments involve risk and may lose money. Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must evaluate and investigate any investments considered or any investment strategies or recommendations described herein (including the risks and merits thereof), seek professional advice for their particular circumstances, and inform themselves about the tax or other consequences of any investments or services considered.

Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser.  For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov  or contact us directly at 411 30th Street, 2nd Floor, Oakland, CA  94609, T: 510-658-1880, F: 510-658-1886,  www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.

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References

DiFurio, Dom. (August 9, 2022). Here’s How Credit Card Debt Varies By State. Experian. https://www.experian.com/blogs/ask-experian/how-credit-card-debt-varies-by-state/

Federal Reserve Bank of New York. (n.a.). Household Debt and Credit Report (Q4 2022). https://www.newyorkfed.org/microeconomics/hhdc

Gravier, Elizabeth. (February 10, 2023). What a high-yield savings account is and how it can grow your money. CNBC. https://www.cnbc.com/select/high-yield-savings-account/

O’Brien, Sarah. (January 19, 2023). Lack of financial literacy cost 15% of adults at least $10,000 in 2022. Here’s how the rest fare. CNBC. https://www.cnbc.com/2023/01/19/heres-how-much-people-say-lack-of-financial-literacy-cost-in-2022.html

O’Shea, Bevand Schwahn, Lauren. (December 2, 20220). Budgeting 101: How to Budget Money. Nerdwallet. https://www.nerdwallet.com/article/finance/how-to-budget

SCDOI. (n.d.) Understanding Your Insurance Policy. https://doi.sc.gov/957/Understanding-Your-Insurance-Policy

Yakoboski, Paul J., Lusardi, Annamaria, & Hasley, Andrea. (April 2022.) How financial literacy varies among U.S. adults. TIAA Institute. https://gflec.org/wp-content/uploads/2022/04/TIAA-Institute-GFLEC-2022-Personal-Finance-P-Fin-Index.pdf