Financial Literacy Matters: Practical Money Management Skills for All

Every person should have an understanding of how their finances work at every stage of life so they can build and improve their safety net with some Financial Literacy.

Financial literacy is the ability to use knowledge and skills to make effective and informed money management decisions. Gaining the knowledge and developing the skills to generate personal wealth is a lifelong process that can begin in childhood with saving a few dollars for toys or treats and evolves to more advanced subjects such as budgeting, retirement planning and investment asset allocation.

Understanding the rules and requirements of borrowing money helps borrowers know which questions to ask when opening bank accounts, applying for credit cards or loans, investing in the stock market or getting enough insurance coverage. Before your first credit card application, learn about credit and how different scenarios and activities affect credit ratings and reports. It can help you avoid making financial decisions that may impact your ability to reach your goals.

If you feel that you do not know much about finances or investing, you are not alone. Financial advisors and organizations such as FinancialSafetyNet are here to help provide specific financial information, strategies and resources which can put the power to grow and protect your financial future back into your hands.

3 Steps to Being Financially Literate

Step 1 – Knowing What You Have

Before you can take advantage of personal financial skills and knowledge, you need to have an idea of your current financial responsibilities. For example:

  • How much money you have at any given time
  • How much money you will require now and in the future for things like living expenses, paying for college, buying a car or retirement
  • How to budget your money so that you can pay your expenses
  • How to grow and protect your money so that you can relax and enjoy your life when you get older

Step 2 – Understanding Concepts, Strategies and Products

Once you know what you have to work with, you will want to read about the concepts, strategies or products which are associated with your accounts or financial goals, for example:

  • Financial concepts such as compounded interest on your savings account, interest charges on your loans, and various credit cards charges
  • Financial strategies such as paying down debt, diversifying your investments, lease-option purchasing your home and methods for lowering your tax liability
  • Financial products such as bank accounts, student loans, debit or credit cards, mortgages, insurance policies, mutual funds, retirement accounts and annuities

Step 3 – Applying Financial Knowledge with Confidence

When you’ve gained a little knowledge about the tips and tools which you think may be useful to you, it’s time to begin applying your financial knowledge by making informed financial decisions. For example:

  • Putting your money in a bank account, CD and or money market account
  • Making a few select investments in the stock market or company mutual fund
  • Choosing to make a large purchase (car or home)

10 Important Financial Literacy Terms

To help get you started, here is a selective list of common terms which will boost your financial literacy.

  1. Pay yourself first: Before you pay bills and other commitments, make sure you set aside savings for your future. Put savings last, and it’s easy to spend a paycheck and have nothing left to save away.
  2. Compounding interest: This occurs when the interest you earn is added to the principal, and then you earn interest on that total. The effect of earning interest on interest makes your money grow faster.
  3. Credit rating: A credit rating is an independent evaluation of the credit risk, or likelihood of default, posed by an issuer of debt or by a specific debt issue.
  4. Diversification: Once you do invest, spread your money over different types of securities so your plans won’t be derailed if a single stock or sector gets hammered. “Doesn’t mean you won’t lose money over the short term, but it does mean you won’t lose significantly more than average.
  5. Inflation: A persistent increase in prices, often triggered when demand for goods is greater than the available supply or when unemployment is low and workers can command higher salaries.
  6. Interest: What you pay to borrow money using a loan, credit card, or line of credit.
  • Investment Portfolio: When one owns more than one security. A portfolio is built by buying additional stock, bonds, annuities, mutual funds, or other investments.
  • Mortgage: A temporary right to the real estate that you are buying with a loan to lender who has given you the loan. The property serves as collateral, or security, that you will repay what you borrowed plus interest.
  • Mutual fund: A professionally managed investment product that sells shares to investors and pools the capital it raises to purchase investments (stock, bonds, or money market securities), or a combination of these investments, depending on the objectives of the fund.
  • Time value of money: Money’s potential to grow in value over time. Money that’s available in the present may be considered more valuable than the same amount in the future.

Empowering Yourself to Make Sound Financial Decisions

If people are empowered with the specific, targeted information about specific financial-life issues needed to make a given financial decision at a particular time, they will take advantage of that learning opportunity. In addition, if you go to your trusted financial advisor with a little bit of knowledge and understanding, you can make more accurate decisions to build a strong financial safety net. Personal ability and a little guidance can go a long way in helping to reach your personal financial goals.

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