How To Become Financially Literate

Unforeseen events, such as the COVID-19 pandemic, can have an impact on an individual’s financial health. For instance, 58% of all Americans are now living paycheck to paycheck. Additionally, 57% of Americans can’t cover a $1,000 emergency with savings, leaving them dangerously close to a financial disaster.

What is financial literacy?

Financial literacy means having a clear understanding of your finances, income, and expenses. It can enable you to make sensible financial decisions and better manage your spending habits. Overall, being financially literate helps you make better financial decisions. Improving your financial literacy can have several short-term and long-term benefits.

Why is financial literacy important?

Financial literacy can help you to develop healthy habits that can better enable you to accumulate wealth, rather than barely staying afloat financially. By being financially literate, you can better plan for retirement and work to avoid increasing debt. By being more financially literate, you can better manage life events such as getting married, having a child, or paying for your child’s education. In addition, you can be better prepared for financial emergencies.

What are the effects of financial illiteracy? 

A lack of financial knowledge can impact the financial decisions you make. Making the wrong decisions could result in an increase of debt, which can be difficult to pay down.  You may become an easy target for predatory lenders or fraudsters who can exploit your financial struggles. 

Moreover, financial worries can have a staggering impact on your physical and mental well-being. Debt-related stress can increase the likelihood of developing depression by 51%. Eventually, this stress may spill over to your personal life and could affect your ability to work.

How does financial literacy lead to better spending habits and better financial decisions? 

Financial literacy is a crucial skill that helps you to make educated financial decisions, can help you to manage your finances more effectively, and can help you to grow your savings. With financial literacy, you can work to meet both your short-term and long-term financial goals.

As inflation rates and prices continue to rise, it’s becoming more important to optimize your spending and investments. By doing so, you can reduce debt and increase your capital, giving you a better chance at financial stability.

Spending in moderation, avoiding high-interest loans and credit cards, and making smart decisions can have significant benefits, especially as you approach retirement. With financial literacy, you can plan for your future and enjoy the peace of mind that comes with financial security.

What are the steps to becoming financially literate?

Financial literacy involves understanding your goals and taking steps to achieve them. This includes getting rid of habits that may affect your finances negatively and working to make smarter financial decisions. Here are some aspects to consider on your journey towards financial literacy:

1. Know yourself: Self-awareness is critical to ensure success on your journey. Assess your current knowledge of financial aspects, including savings, tax planning, and investments. Determine the depth of your knowledge and the topics you want to learn more about. Consider your personality traits and identify behaviors that can help you on your journey.
2. Set goals and a budget: Having short-term and long-term goals is important. To better help you achieve your financial goals, it can be helpful to set a budget and work hard to stay within it. You can think about building an emergency fund or explore ways to grow your money through stocks and other investments. 
3. Track your spending: Monitor your spending, even if you have a rough idea of which items account for most of your expenses. Take action to control or reduce spending, such as cutting back on shopping or using credit cards. Being aware of where your money goes is one of the first steps towards building smarter financial habits. 
4. Use financial management tools: You can strengthen your understanding of financial aspects by exploring tools such as spend analyzers, budget trackers, and investment simulators. These tools may be able to help simulate different scenarios based on your habits and offer ways to help your actions align with your goals.
5. Manage your debt: High-interest loans and credit cards can have an adverse effect on your financial health. It can be helpful to work to reduce or control your debt.
6. Monitor your credit score: Keeping an eye on your credit score is a smart financial habit. You can easily monitor and improve your score with Kashable’s free Credit Monitoring tool, which allows you to keep an eye on your credit score and track changes on your accounts over time.
7. Keep learning: Continuously learn about personal finance resources through books, podcasts, or videos. Kashable’s Financial Literacy Library is filled with educational resources designed to help you succeed. It’s available to all employees, regardless of whether you take a loan. Our library offers resources covering topics such as saving, borrowing, and credit scores, which can help boost your personal finance knowledge and enable you to make informed financial decisions.

Conclusion

Being financially literate can better enable you to make smart financial decisions and have a clearer understanding of your income, expenses, assets, and liabilities. To improve your financial literacy, start by setting your goals and creating a budget. Also, it may be helpful to explore financial management tools which may help you to stay on track and better avoid high-cost debt.

Kashable is committed to helping employees improve and protect their financial wellness. We offer low-cost loans and a range of financial wellness resources to help you plan and work towards your financial future, giving you the ability to achieve your goals with greater confidence.