Do you approach your finances with confidence? If the answer is no, you are not alone. According to a recent survey, as many as 1 in 4 are uncertain about their ability to manage their finances properly. Confidence comes from knowledge and practice. The more you understand financial topics, the better equipped you are to make financial decisions. 

To get you started on the path toward greater financial understanding, we compiled this quick guide that covers financial literacy, what topics you need to learn about, and where you can find the resources necessary to feed your quest for knowledge. 

What is Financial Literacy?

Financial literacy involves learning about, understanding, and executing basic financial skills like budgeting, building credit, and investing for retirement. 

Educating yourself on financial topics is the first step in gaining literacy. Once you understand a financial topic, you can then put it into practice. The more you learn, the more confident you become in managing your everyday finances. 

From simple concepts like opening a bank account to advanced financial issues like portfolio diversification, gaining knowledge can help you achieve your financial goals.

Why Financial Literacy Is Important - The Cost of Financial Illiteracy

Financial illiteracy is estimated to have cost the average person $1,506 in 2023. That’s a significant chunk of change. The source of this financial loss included credit card interest charges, bank overdraft fees, and being the victim of fraud. 

The other costs associated with a lack of financial knowledge are harder to measure. In a Federal Reserve survey, more than 30% of respondents didn’t understand interest, and 33% didn’t grasp inflation. Not understanding interest could cost you more on a loan, while not grasping the impacts of inflation could lead you to underestimate your monthly expenses. 

What Are The Core Concepts of Financial Literacy?

While there is no definitive measure of financial literacy, understanding the key financial topics that are a part of everyday life is a great first step. Below, we’ll cover five financial issues that are an essential part of gaining financial literacy. 

Personal Finance Basics

Learning about any subject requires starting with the basics. So, what are the finance basics?

Financial basics largely revolve around what money issues will impact you daily. For instance, how to open and use a bank account. This knowledge affects how you manage your income and expenses and is an essential first step in crafting a budget. 

Let’s look at some other personal finance basics

• Banking - what services are offered

• Borrowing - what is involved in taking out a loan

• Credit cards vs. debit cards - how do they work

• Interest - how are you charged interest on credit cards/loans versus how do you earn interest on savings accounts and investments

• Income - how much do you make, when are you paid, how is your pay calculated

• Credit- what is your score

• Insurance - what do you need, why is it important

• Setting financial goals - how to set realistic goals and achieve them

Once you have a good grasp of the basics, you can dig deeper and discover more about the topics most important to you. 

Budgeting

Budgeting is balancing how much you earn each month against how much you spend. There are three key components to a budget: income, expenses, and financial goals. 

Based on these concepts, there are a variety of budget methods and strategies you can try. 

• 50/30/20 - The rules are simple: 50% of your income goes to needs, 30% is earmarked for your wants, and the remaining 20% is used to build your savings or repay your debt. 

• Zero-based - Put every dollar to work. The goal is to spend or save every dollar of income each month, which requires careful expense tracking. 

• Bare-bones - building up your savings is the goal of this budget type. All expenses are pared down to the absolute necessities with the goal of saving the rest. 

• Values-based - The values-based method lets you focus your budget on what matters to you, whether that’s travel, giving to charity, or spending time with your family.

• Envelope system - While few people still stuff physical envelopes with cash, the goal of setting strict limits on each category of spending still makes this budget method a good choice for those prone to overspending

• Pay yourself first - This method, also referred to as reverse budgeting, focuses on savings. The simple rule is to put money into savings before paying bills or spending on wants. 

• Paycheck budgeting - For those with a limited income, fluctuating income, or multiple income streams, this method lets you earmark each paycheck for different purposes.

• The no-budget budget - There’s just one rule: pay your bills. That’s it; the rest of your income can be spent however you like.

Regardless of which budgeting method you choose, the goal is to track your income/expenses and stick to your budget.  By creating an effective budget, you can avoid debt, increase your savings, and enjoy the confidence of knowing where your money is going each month. 

Credit

Credit is a complex subject, but understanding the basics is crucial. Why? Because credit affects everything from getting a cellphone to purchasing a home. 

The easiest way to wrap your mind around credit is to think of it as your financial report card. The three major credit bureaus, Experian, Equifax, and TransUnion, grade you on your financial behaviors, such as paying your bills on time and using your credit wisely. This is what makes up your credit score. 

Getting a good credit score is all about how you manage your debts. You can start building a solid credit score by making on-time payments, keeping your credit utilization low, and limiting how often you apply for credit. 

With good credit, you can get better car insurance rates, lower APRs on loans, and qualify for premium credit cards. And remember, it's not just banks and credit card companies that will check your credit – landlords, employers, insurance companies, and utility providers can also pull your credit.  

Saving & Investing

Saving money is like budgeting for your future. Whether you have the goal of sending your children to college loan-free, planning for a stress-free retirement, or simply taking a much-needed vacation, learning how to save money can help get you there. 

When it comes to savings and investing, there are four questions to ask

1. What do you want to do with your savings?

2. How much do you need to save?

3. How often can you contribute to your savings?

4. Where should you keep your savings?

An emergency fund is one good example. This type of savings account aims to protect yourself in financial emergencies, such as your car breaking down or losing your job. It is recommended that you save at least three month’s income in your emergency fund, and you should keep the funds readily accessible, possibly in a high-yield savings account. 

Emergency funds are a short-term goal, much like saving for a vacation or a new car. Long-term savings goals like college funds and retirement need to be handled differently. 

Investment accounts, like a 529 for college savings or a 401k for retirement planning, have specific rules, tax implications, dedicated fees, growth options, and more. These accounts earn interest very differently and have strict withdrawal limitations. 

While you don’t need to understand all the ins and outs of the investing world, grasping the basics can aid you in making informed investment decisions. 

The most crucial element to any savings goal, long-term or short-term, is sticking to your plan. Stay focused on why you are saving money and how great it will feel to achieve your goals.

Taxes, Insurance, and Your Estate

Finally, let’s talk about the depressing three: taxes, insurance, and estate planning. These topics might not be high on your list to learn about, but they are essential to financial literacy. 

After all, you pay taxes every year, could be fined for not having insurance, and, as much as you hate to admit it, you will die one day. 

Taxes are the biggest concern here. Nearly everything you buy is taxed. Your paycheck is taxed. And, of course, you must file your taxes with the IRS every year. There’s no way to avoid taxes entirely, but by planning/paying ahead and maximizing your tax credits and deductions, you can avoid an unexpected tax bill.

Insurance is a lot more variable. There are many different types of insurance; some you may need, and others you may not. 

• Car insurance - required in 49 out of 50 states

• Health insurance - reduces your medical costs

• Life insurance - protects your family when you are gone

• Business insurance - protects your business and business assets

• Home/renter insurance - protects your home and your possessions

• Travel insurance - covers the cost of your trip when delayed, interrupted, or canceled

The final financial topic, estate planning, might be the most depressing, but it is arguably the most important. Estate planning includes drafting a will, drawing up a financial and medical power of attorney, purchasing life insurance, managing your investments, documenting your assets, and determining how to provide for your family long after your death. 

How to Improve Your Financial Literacy

Did you know that nearly 40% of people don’t know what a high-yield savings account is? And that more than 1 in 4 Americans incorrectly believe checking your own credit score lowers it. Add to this the fact that 90% of people say money issues stress them out, and it's easy to see why financial literacy is important. 

But how do you fix illiteracy? What resources are best for learning more about financial topics? 

Internet Research

One of the quickest and easiest ways to learn more about finances is to do research. A quick internet search on “credit” will yield a wealth of information. Or type “how to open a bank account” to view numerous step-by-step articles and videos. 

The internet can be a great resource for learning about financial topics, but be cautious; not all information is 100% accurate. Here are a few excellent, trustworthy internet sources. 

• The Internal Revenue Service website

• Consumer.gov

• Social Security website

• Credit bureau websites

• Bank websites

• Investing sites (i.e., Fidelity, Vanguard, etc.)

For more ideas, check out OCC.gov’s list of financial literacy resources. 

Get Guidance From A Financial Advisor

Between 66% and 80% of people, depending on age range, view financial advisors as a trustworthy source of financial information. Financial advisors are there to listen to your financial concerns and offer you expert guidance on achieving your goals. 

They can help you learn more about your credit, plan ahead for your taxes, craft a realistic budget, plan for retirement, open a college fund, draft an estate plan, and more. They can also help you avoid common financial pitfalls and ensure your portfolio and finances remain on track. 

Finding a financial advisor is pretty straightforward, but it may take some time to find the perfect fit. An excellent financial advisor is one who listens to you, has your best interests in mind, and helps you work towards achieving all of your financial goals. 

Talk to Your Banker

Another good resource for financial knowledge is your local banker. Bankers are experts on the financial products they offer, such as savings accounts, CDs, credit cards, loans, and more. They can also be a good resource for general budgeting, credit, and personal finance knowledge. 

However, talking to a banker might not be the best choice if you are looking for insight on retirement accounts or investment strategy. Instead, you should contact an investment firm or a financial advisor for help with retirement planning.

The Aligned Perspective: Your Financial Literacy Journey

Gaining financial literacy is essential. It helps you avoid common financial pitfalls and fraud, gives you confidence in managing your finances, and helps you achieve your financial goals. 

How much do you want to learn? No one is going to quiz you on the basics of budgeting or how credit scores work, but learning more can help you make informed decisions and possibly save you money, too. 

Whether you choose to learn from the internet or an industry expert like a financial advisor, strengthening your financial literacy is an important step in helping you manage your finances confidently, effectively, and stress-free.