What is Financial Literacy and Why Is It Important?
Just as learning to read words is an invaluable life skill, financial literacy is a skill that carries incredible importance. By definition, financial literacy is the ability to utilize and fully understand skills associated with money and finances. As with most life skills, the earlier you start, the better. Financial literacy is no exception to this rule.
Financial literacy is composed of the following elements:
- Managing your personal finances
- Establishing a budget
- Investing in savings
Being financially literate makes you a smart consumer. When you have a solid grasp on how much money you have coming in, going out and goals for savings, you are setting yourself up for success. Being able to handle your own finances leads to a stable and secure lifestyle, in which you are well set up to provide for your needs and the needs of your dependents. This is also incredibly empowering! According to a study by the National Library of Medicine, efficiency with one’s own finances directly correlates to greater life satisfaction.
Financial literacy also helps to protect you as a consumer. Individuals who are financially literate have better debt management skills, and are less likely to make poor decisions regarding their money. This also leads to borrowing responsibly, and having more money available for savings and big life purchases. While it is possible to get out of debt, this is a slow moving process that takes time. While there are resources that exist, and even debt management negotiators who you can work with to help you get out of debt, and debt consolidation loans like a secured title loan, your credit score will likely take a beating if you get yourself into debt. Those who practice good financial literacy skills from a young age can avoid this, and spend less money overall in the long run.
Furthermore, consumers who are financially literate can better protect themselves against fraud. With the rise of online shopping and different online platforms, credit card fraud is an increasing problem in the United States. According to the National Council on Identity Theft Protection, there has been a staggering $246.1 million dollars of loss due to credit card fraud so far in 2024. It is incredibly important to have a solid understanding of your finances, and to regularly check transactions on your credit cards and bank statements. It is a misconception that credit card theft can only happen when you are traveling abroad. On the contrary, a recent U.S News and World Report revealed that 84% of individuals who experienced identity theft when they were home and not traveling.
Individuals can learn to be financially literate at any age. Even if you have a troubled financial past, you can still implement these steps and changes into your life at any age. While these are important skills and habits to develop at a young age, you and your future dependents can still benefit from learning these later in life. Saving, particularly when you are young, is the first step towards building a solid foundation for your financial future.
Saving When You’re Young
Saving money when you’re young is crucial for your overall financial wellbeing. According to Psychology Today, long lasting habits can be formed in children as early as 9 years old. By starting to implement and practice good money management skills as early as possible, you are paving the way for a solid financial future.
In addition, when you are young, time is on your side. Saving early allows you to harness the power of compound interest. Consider investing in accounts that yield high interest over a long period of time. A 529 plan, Roth IRA accounts or savings bonds are all great resources to look into when you are young. There are also many accounts specific to higher education that you can invest in to help cover college tuition costs.
While retirement may seem eons away, the best time to start saving for retirement is now. Experts agree that it is beneficial to start saving for retirement in your 20s. The earlier that you start saving for retirement, the less aggressively you will need to save later on.
Money Management Tips for Young Adults
While money management is crucial at all ages, wielding the power of financial literacy when you are young can help you to improve your entire wellbeing. If you are a young adult, looking for smart money moves to make, consider:
- Budget
- Build an Emergency Fund
- Avoid Debt
Budgeting and goal setting are two of the most important steps you can take towards your financial health. Track your income and expenses, and learn how much money you have to work with each month. It is incredibly important at this age to learn to live within your means. Simply stated, do not spend money that you don’t have. Many credit card companies are eager to grant credit to young borrowers. While credit cards can help you build credit, it is incredibly important to borrow responsibly. Try to pay off your credit cards each month. If you are unable to pay off the entire balance at the end of the month, you should strive to carry no more than 30% of your total credit allowance on each individual card.
Building an emergency fund is another solid step that you can take to better your financial future. Even if you are not making a huge salary in your young 20s, it forms good financial habits to set aside a portion of your paycheck each month to put towards an emergency fund. A good rule of thumb is to have an emergency fund that can cover anywhere from 3-6 month’s worth of living expenses. Particularly in your younger 20s, individuals are often in the early stages of their careers. At this point, employees are more susceptible to layoffs or position changes that can affect the money coming in each month. A solid emergency fund will help you to avoid taking out high interest loans in case of an emergency.
Financial literacy is a constantly evolving concept. Depending on your lifestage, age and dependent status, your goals will and focus will change and fluctuate with each adjustment. Building these habits at a young age can help to set you up for financial success throughout your entire life!
