It’s easy to talk about how important financial literacy is in principle. But without concrete examples of why it’s a helpful skill to have, it can be harder to understand why it’s something you want to cultivate in practice.
When financial literacy remains an illusive topic people gatekeep, nobody wins. So, let’s unpack what it means to be financially literate, and what you stand to gain by beefing up your literacy.
What is Financial Literacy?
Financial literacy is a broad base of skills that helps you use money and financial products in your favor. It can include the basics, like balancing a budget and understanding terms and conditions, to more complicated functions like how capital gains affects your taxes or your utilization ratio impacts your credit sore.
At its core, financial literacy represents an understanding of personal finances so that you can make informed and confident decisions regarding your money. This knowledge helps you avoid making poor decisions that cost you.
What Are the Perks of Getting Literate?
A full list of the benefits of financial literacy could very well be endless. But you’re a busy person — you don’t have that sort of time, so let’s be concise. Here are the top three advantages of increasing your literacy — whatever that means for you.
1. Borrow with Awareness
Nearly everyone has to borrow at least once in life — whether it’s to afford a formal education or to replace your furnace on a tight budget.
Regardless of why you need extra cash, borrowing can be a thorny subject. What are your potential options and how much will they cost you? Cost is an important factor when it comes personal loans, student loans, mortgages, and credit cards. It tells you whether you can afford to borrow with a particular lender.
Without understanding how rates and finance charges apply, you can accept impractical student loans or costly payday cash advances. Greater financial literacy empowers you to make smarter decisions about personal loans.
2. Maximizing Your Rainy Day Fund
You might be able to sidestep borrowing entirely when you establish a rainy day fund. A rainy day fund is a catch-all savings account that provides funds for unusual and unexpected expenses you didn’t think to budget for.
A strong foundation in financial literacy teaches you all about how compounding interest works for you. It’s not just something that applies installment loans and lines of credit, by the way!You can leverage this knowhow into choosing the right savings account for these funds — one that balances your need for quick accessibility and a high interest rate.
3. Invest in Your Future
A rainy day fund is a relatively shortsighted way to prepare for your future. Financial advisors recommend you save six months of living expenses in this account, at most, so it’s not going to help you make massive changes in your life.
For education, realty, and other large purchases, you need to understand how tax advantaged funds and stocks can help you build greater wealth.
Are You Ready to Boost Your Financial Literacy?
If you’re ready to take the first steps to learning more about how the financial world works, talk to your bank about setting up a counselling meeting. In the meantime, check out these free resources:
• MyMoney.gov
• Investopedia
• The Balance Money
• Federal Reserve Education
• National Foundation for Credit Counseling (NFCC)
Financial literacy is a journey that looks different for everyone.Start where it makes sense for you and go from there.
