It’s never been a better time to learn about financial literacy basics. With the cost of living increasing and household debts rising, it’s critical to learn how to manage cash so you aren’t thrown for a loop by your finances.
Unfortunately, financial illiteracy is widespread within the United States, as 65% of Americans are financially clueless and are unable to manage their money.
While literacy may be lacking, financial knowledge can rapidly be built through basic lessons. So, regardless of your age, now is a terrific time to gain foundational knowledge regarding money.
The prepper’s book is ideal for anyone interested in improving their financial literacy. Remember: it is always possible to learn.
Before we delve into our financial literacy guide for newcomers, we first need to describe what basic financial literacy skills entail.
What are the basics of financial literacy skills?
Financial literacy refers to a wide range of subjects, including budgeting, banking, investing, managing debt, and planning for the future. When you learn the basic principles of these topics, you’ll be able to make effective financial choices and accomplish your goals.
You may also help family members. For example, you can advise your children on how to start a freelance job or save for a home loan.
What are the benefits of understanding financial literacy basics?
If you have doubts about becoming financially literate, here are some compelling reasons why you should make the effort to learn more.
Pass on excellent financial literacy skills to our children
A study by David Whitebread and Sue Bingham from the University of Cambridge revealed that financial habits are instilled in children as young as 7 years old.
Teaching your children financial concepts at an early age will help them get started on the proper foot as they age.
Being equipped to reach financial goals
We all have financial goals we want to achieve. Some of us want to plan for a comfortable retirement, while others want to become a homeowner or save for our children to attend college. Think of your goals as your destination. And the principles of financial wisdom as the road to get you there.
Reduced expenses
Tracking your expenses is simple; it doesn’t take a lot of work to mismanage your money. Budgeting is not as hard as it seems.
Splitting expenses saves you a great deal of money on needless purchases. By reducing your expenses, you’ll have more funds to put toward the things you cherish in life.
Less stress and anxiety about finances
The Financial Industry Regulatory Authority reported that 65 percent of women feel anxious about their finances, whereas only 54 percent of men do. A common reason for these high degrees of anxiety is low financial literacy.
Therefore, increasing your financial literacy can help alleviate some of this stress. It may also improve relationships with family once this strain is gone.
Better money management
Do you think that your budget controls you, rather than the other way around? Learning some financial wisdom for novices tips will help you get back control of your money.
You can learn ways to reduce debt, build up your savings fund, and remain on top of your expenses.
5 Financial literacy basics for beginners
Are you ready to begin? We’ll walk you through five key areas of financial literacy for novices.
1. Opening a bank account
Bank accounts are a secure way to save your money. After all, it’s much more difficult for criminals to steal from a bank account than to steal money from your home or purse. You will have immediate access to your money when it is kept in a financial institution.
Another benefit of having a bank account is that your money is protected by government-backed insurance. The Federal Deposit Insurance Corporation insures US bank accounts offered by retail banks.
Credit unions are insured by the National Credit Union Association. So whether you choose a bank or a credit union, your money will be protected.
You may also choose to set up an online or brick-and-mortar bank account, depending on your preference.
Here are some of the different accounts you can register for:
A checking account is useful for your day-to-day budgeting. You can make deposits such as your salary into your checking account. You’ll withdraw from ATMs, banks, electronic transfers, or with a debit card connected to the account.
Some checking accounts may charge you a monthly fee in addition to other charges, such as using an overdraft. But there are even some free checking accounts to choose from as well.
Always do research and understand the terms and conditions before opening a bank account.
Another of your financial literacy tips is to link a savings account to your checking account. This will increase your savings and earn more interest by holding your money in your savings account.
Choose between a high-interest savings account and a regular savings account. Differences? You will need to make a larger initial deposit and have a higher minimum balance to qualify for the high-yield savings account, but you will earn higher interest.
56% of Americans don’t have enough savings to cover a $1,000 emergency medical expense, leaving them unable to protect themselves in case of an emergency. Open a separate emergency savings account and contribute at least three to six months’ salary to it.
You can be assured that you have money readily available if you ever suffer hardship. Your emergency fund can help if you suffer from a job loss, large repair bill, or medical expenses.
2. Using credit and debit cards
Rather than carrying cash around, you can conveniently use plastic credit or debit cards for purchases. They fit easily into your wallet, and you can simply swipe them or enter your account details online to pay.
But there are crucial differences between credit cards and debit cards.
Our checking account is paired with a debit card. This is different from borrowing money because when you use it, the amount will be deducted from the account balance. You can’t spend more money than what you have available to spend.
With a credit card, you will have a maximum limit that you are allowed to borrow from your credit card supplier. When you use your credit card, this amount will be added to your outstanding debt.
Money is not taken out of your bank account when you use your credit card, but you will be charged interest as well. If you spend $500, you will owe $500 and your credit card interest, for a total of $550.
You will have to pay a minimum monthly fee. However, it’s better to pay down your debt more quickly and not pay any more money than is necessary.
3. Taking out loans
Similar to credit cards, personal loans can finance major purchases like car and home improvement expenses, as well as medical debt. A frequent type of personal loan is a mortgage.
This allows people to purchase hundreds of thousands of dollars that might have taken decades to earn.
This sounds encouraging, but you should know how to deal with loan products and the consequences involved if you can’t make your monthly payments.
APR is an acronym for annual percentage rate. It refers to the amount of interest you will be charged on any unpaid credit balance.
Loan products vary widely with the APR they charge, so it is important to compare loan products carefully before making a loan application.
The APR you are offered may be contingent on your credit score. If you have had a history of bad credit and may have missed a few loan payments, the lender may offer you a higher APR.
This makes them believe that you are more of a danger to others. People with better credit ratings might have a better chance at more favorable terms. The APR for credit cards is currently 1
While you should avoid using credit cards and loans, the advantage is that using credit and building a good credit score enables you to qualify for loans, credit cards, and other financial products, which demonstrates your reliability and qualifies you for financial services.
But paying your bills can also lead to bad credit.
When you apply for credit, a lender will run a credit check that includes examining your credit score. This will vary between 300 and 850, with higher scores representing more trustworthiness to potential lenders.
Your score is based on factors such as how many accounts you have open, what you pay, and your overall levels of debt. Some banks use the FICO system, but others use systems such as Vantage Score.
4. Budgeting for beginners
One of the most essential financial literacy tips is learning how to create a budget and why we use them. A budget lists your personal income and expenses from month to month, enabling you to examine your spending and savings.
You’ll be able to determine how much money you earn, how much you spend, and how much you’re able to contribute to your financial goals.
Your first major step is determining how much you pay per month versus your monthly earnings. If your expenses are greater than your income, this imbalance will worsen your debt.
Determine if this is a difficulty by looking at your expenses. Gather the last few months of bank statements, and calculate how much you are spending and where you could make improvements.
Some examples these are fixed costs (such as your mortgage or childcare bill), while others are variable (such as your shopping bill).
If you’ve already tried cutting back on expenses and the numbers aren’t working, you’ll know that you have to make more money. You might consider requesting a raise, looking for jobs with a higher salary, or earning extra income on the side.
Every man starts at a beginner level in financial literacy, but we all face different goals and interests. Teens and young adults may want enough money to attend college or go on a worldwide trip with their friends.
a few years later, they are more interested in saving for a down payment on their first home or establishing their retirement contributions. Parents may have financial goals to save for their children’s college tuition or even fund their fantasy weddings.
Divide your goals into short-term, medium-term, and long-term categories. For instance, saving for next year’s vacation will require different budgetary requirements compared to an early retirement goal.
How much do you need to know to reach these goals, when can you achieve them, and how much money should you set aside each month to get there?
With all budgeting methods available, you will be able to track your income and expenses while saving for the future. However, reverse budgeting, zero-based budgeting, and the 60-30-10 rule are just a few of the many budgeting methods used.
For every dollar that is in your budget, the zero-based budgeting method allows you to account for it. However, the reverse budgeting method offers an easier method for tracking your income and expenses.
This is where you deposit 20% of your income, and the remainder goes toward your expenses.
The key is to select a budget plan that is convenient for you to follow.
5. Investing for beginners
Understood the fundamentals of financial literacy? Then you will want to earn your money work for you. That’s where it is handy to understand the principles of investing your money.
Unless you plan on working indefinitely (which few of us are!), retirement planning is the greatest investment you can make to support your later years. As pensions have become increasingly less common, many people rely on their 401(k) as an employer-sponsored contribution plan.
When you sign up for a 401(k), you agree to invest a percentage of your salary into your plan. And your employer might match either part or all of your contribution.
In terms of tax, 401(k) plans operate on a pretax basis, which means that the contributions come out of your earnings before tax is taken out. Another option is to invest in a Roth IRA (individual retirement account).
They do not offer tax deductions when you donate, but deductions are tax-free once you retire.
Buying a house may initially be your main financial goal, but it doesn’t have to stop there. Investing in real estate lets you rapidly grow your wealth and even generate a passive income.
This guide covers different methods of purchasing real estate for novices, including flipping houses, becoming a landlord, and getting involved in real estate crowdfunding.
To invest in the stock market is to invest in an investment vehicle with the intent of obtaining a profit in the future. Essentially, you want your investment to grow with minimal effort on your part.
You may invest in goods from different companies. Alternatively, you may purchase vehicles such as a mutual fund that aggregates products from multiple manufacturers.
We’re here to bust the myth that you need to be wealthy to invest in the stock market — in fact, you can start with as little as $1,000. Take a look at this guide to purchasing individual stocks for more helpful suggestions.
Cryptocurrency is the newest kid in the investment block. And frankly, cryptocurrency is a notoriously unstable market. This is not the best investment strategy for anyone learning basic financial principles.
With enough investment, you will buy virtual money with cash from your bank account. Cryptocurrencies such as Bitcoin, Litecoin, or Ethereum are is available through exchanges such as Coinbase.
Witness your wealth increase or decrease, or exchange it for other kinds of crypto that are increasing in worth.
Put these financial literacy basics into action
Now you know the basics of financial literacy, and ideally, you will feel empowered to make positive changes to your finances. The only thing left to do is to act.
So go ahead and open a bank account, create a sensible budget and practice financial wellness for novices to create a comfortable and rewarding future.
