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Many people find money matters intimidating. But in reality, they don’t have to be.
“But how can you manage your money most efficiently?” – you may ask. The answer is by becoming financially literate.
So let’s dive into what financial literacy really means, and discover seven practical steps that will help you to become a financially literate person and get the most out of your money.
What Does It Mean to Be Financially Literate?
Financial literacy is the power to realize and efficiently use personal financial skills like money management, budgeting, saving, and investing. Basically, financial literacy is the foundation of your relationship with money.
Since financial literacy is a lifelong learning journey, the earlier you start developing it, the more progressed you can become. After all, education is the key to success, and it applies to money as well.
How to Become Financially Literate? 7 Practical Steps
Developing financial literacy can significantly improve your personal finances. It takes building good habits learning and practicing a variety of skills related to budgeting and managing your money, as well as paying off debts, understanding credit and investments.
Let’s take a look at some of the most crucial and practical strategies that can help you become financially literate.
Becoming financially literate involves educating yourself, familiarizing yourself with financial terms and practicing a range of skills related to budgeting, managing money, paying off debts, and understanding investments. Basic steps to improve your personal finances include creating a budget, keeping track of expenses, being diligent about timely payments, being prudent about saving money, periodically checking your credit report, and investing for your future.
Step 1: Create a Budget
Tracking how much money comes into your pocket each month vs. how much you spend is an excellent first step you can take to develop your money skills. You can either use an Excel file, pen and paper, or a budgeting app to create a budget.
Here’s what your budget should include:
Any type of income, such as paychecks, investments, or other sources
Fixed monthly expenses, such as rent or mortgage payments, grocery purchases, utilities, and loan payments
Non-essential expenses, such as eating out, traveling, shopping, etc.
Step 2: Keep Track of Your Expenses
Keeping track of your expenses is the only way to create a precise budget you can follow. Simply write down where your money goes each month to understand how much money you can set aside for savings.
Not only that but keeping track of your expenses will help you identify where you might be overspending so you can cut down in those areas.
Step 3: Save Money
The best way to build a savings account is to choose your savings goal first — for example, a down payment for a new home or a vacation. Once you’ve identified your financial goal and understand how much you need in order to reach it, decide how much to contribute toward it each month.
The main thing here is to set that exact amount aside consistently.
Step 4: Build Your Emergency Fund
Let’s be real – Life happens! And you might need a certain sum of money to cover an unexpected bill you may suddenly receive.
While many people will run to the nearest bank to get a loan, building an emergency fund is the smartest way to keep yourself out of debt and cover your unexpected bills.
Step 5: Pay Yourself First
Whether it’s for a vacation, a down payment, or an emergency fund, saving money is a challenging task for many. You might have a savings goal but, regardless, end up spending the money before it ever makes it into your savings account.
That’s why it’s recommended that you pay yourself first and put aside the amount you’d like to save each month as soon as you receive a paycheck. Make sure you put money in your savings first, and then you can consider the remainder to be your spending money.
This way, you’re prioritizing your savings and will reach your savings goal much easier. Most importantly, don’t forget to turn this into a habit and to resist yourself from taking money out of your savings account. (Auto-transferring money into savings may be your best bet.)
Step 6: Invest in Your Future
Most employers offer a 401(k) retirement account. So make sure to use it and contribute to it to receive the employer match.
Alternatively, if your employer doesn’t offer a 401(k) account, you can consider opening an IRA (an individual retirement account). In this case, you’ll be creating a diversified portfolio of stocks and commodities. However, we recommend that you take professional advice before diving into the world of investing.
Step 7: Read Personal Finance Books
Reading personal finance books can help you deepen your financial literacy and strengthen your skills even more.
There are indefinite books about money, but you could start with these financial literacy books.
Ready to Become Financially Literate?
Now that you understand what financial literacy means and how to improve your money skills, it’s time to put the seven practical steps mentioned here into action.
Financial literacy is so important because when you have adequate financial knowledge, you make informed financial decisions. In this case, you’ll be thinking before making any financial decision and ultimately try to minimize impulsive spending.
To help you set your financial goals, see what Monorail can do to help you on your journey.
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