Personal Financial Literacy [Easy Step-By-Step Guide To Finance 101]

Have you heard of the term personal financial literacy? Many people haven’t but it just means knowing how to manage your money.

That means you can pay your bills, save money, and have all your financial obligations taken care of. You also learn why to invest and how to invest smartly for your retirement.

Now is the time to self-educate yourself and grow your knowledge of being financially independent. That starts with money management basics and allowing yourself to develop into a more mature spender.

Below you’re going to learn about personal financial literacy including how to invest and save more by leveraging your resources (age, money, talent, and good habits) to build a nest egg.

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What Is Personal Financial Literacy And Why Is It Important?

Financial Li, as it is sometimes called, means that you are learning the basic skills for managing money. These are the money management skills that are going to stay with you throughout your life.

Unfortunately, not everyone is going to learn about personal finance. Financial education isn’t taught in many high schools and colleges.

Many people leave school and find that they don’t know how to do the basics of budgeting or money management. By not learning the money skills they need, people often run into credit card debt, high student loans, and other problems. 

When you first start to think about personal finance, it can be overwhelming. You have to keep track of money coming and going, tons of due dates, fees, and other charges. It’s daunting to learn yourself which is why I’m here to help.

Traits Of Someone Who Is Financially Literate

Having a personal understanding of financial literacy makes it easier for you to succeed as an adult. By understanding how credit works, you’re better able to budget and prevent yourself from falling into debt.

If you don’t have the cash from something right now, learning delayed gratification is a skill that will take you far. Many aren’t capable of putting off their immediate demands to gain things in the long-term.

Having financial stability most likely means that you budget and save. You protect your savings and only spend wisely when you must. Big purchases are well-thought-out, and you make sure that the value is good.

You understand that debt is what prevents you from building wealth. Many believe there is good debt and bad debt but I’ve found that overall, debt keeps you in the cycle of living paycheck to paycheck.

This also means paying close attention to your overall portfolio (savings, earnings, and investments). Someone with an understanding of personal finance realizes that they don’t know everything and will ask for help when life throws you a curveball.

Personal finance is a broad topic, but financial literacy means that you’re not going to let your money (or what you don’t have) stop you from working hard, being happy, and building your dreams from scratch while focusing on retirement.

What Are the Basics Of Financial Literacy?

The basics of personal financial literacy include managing your money and budgeting. You’ve got to handle your finances appropriately, which drives the saving and spending decisions you make each day.

Personal finance professionals advise that people know the basics of managing their checking, savings accounts, and paying bills on time. To manage your money most effectively, pay attention to how you spend and what you spend the most money on. Also, it’s imperative that you don’t live beyond your means.

Understanding Bank Accounts

Developing the ability to make your own financial decisions starts with you opening a checking account. Have your paycheck direct-deposited into it so that the money is secure, and you never have to worry about it being late.

Also, never use a check-cashing service. They charge exorbitant interest rates and fees to give you your money.

Bank accounts are convenient and give you many benefits. Debit cards and checks are two of these. Both proof that you paid your bills, giving you a record of each transaction.

It’s wise to open a savings account at the same time as your checking account. That way, you can allocate some of that money to savings.

You don’t need to worry about leaving your savings at a bank as long as they’re FDIC insured. The FDIC is going to insure funds of $250,000 or less so you never need to worry about the bank going under and losing all your savings.

Checking/debit accounts can also help you set up some automatic payments for your monthly bills. That way, you don’t need to have cash with you or accidentally forget the bill’s due date.

Setting up a second savings account only for an emergency fund is smart. This is money you’re saving in the event of a financial emergency such as a job loss or unexpected house repair. It’s recommended to build your emergency fund savings up to 3-6 months of your household expenses.

It’s often better to use two separate accounts so you can keep savings separate from checking. This removes the temptation to spend your savings. It’s easier to overspend without realizing it.

Remember, the goal is not to get into debt by living beyond your means. You don’t ever want to have to use payday loans or take out high interest financing.

With technological advancements, you can now use a mobile app to get updates from your bank, making it easier to see what funds you have available.

Budgeting

A building block for personal finance plans is to budget your expenses every month. While it is easy to learn, it’s also hard to do if you’ve never done it before.

To budget successfully, you’ve got to put away all of the qualms you have about what you think you spend and focus on what you actually do.

It’s analytical and often requires you to change up your spending habits. However, this allows you to control the money instead of it controlling you.

A successful budget defines:

  • Ways to lower the monthly bills
  • Following your monthly spending plan
  • Handling accrued debt
  • Pay-off options for your debt, such as the debt avalanche or snowball methods
  • Distinguishing between long-, short-, and mid-term goals
  • What your family needs

So, how do you get started with your budget? I think it’s best to just jump in. You’ve got to see how and where you spend money, identify the financial holes, and work toward correcting them.

Here are some steps:

  1. Track your monthly expenses. You can find many mobile apps or use a budgeting notebook, but record every time that you spend money. It doesn’t matter how large or small the transaction was; all must be recorded.
  2. Identify the expenses you have, both fixed and variable. A fixed expense is one that comes out each month, including car payments, rent, electricity, water, and more. Variable expenses can include things like groceries, haircuts, pet supplies, and entertainment.
  3. Add everything up. Record everything for three months, add it all up (the totals), and divide by three. This is what you’re spending every month on average. Also, focus on sinking fund categories here.
  4. Study variable expenses. Most people overspend on the variable category. Maybe it’s time to set a specific amount that you can spend on dining out and other entertainment options.
  5. Consider your savings account. Every piece of financial literature out there tells you to pay yourself first. This means that each paycheck should have a portion removed and added to the savings account. Most people consider 20 percent of their check is going to go to savings. Then, 50 percent should be toward fixed expenses, and 30 percent can go to variable ones.
  6. Cut what needs to be cut. When you can, reduce the amount you spend and increase what you can save. That is the best way for you to have the money needed to make the most appropriate financial decisions.

5 Main Components Of Personal Financial Literacy

There are five components to understand for financial literacy:

  • Budgeting
  • Saving/Investing
  • Borrowing
  • Interest Rates
  • Financial Safety/Identity Theft

The main three include earning, saving, and borrowing. If you do nothing else, learning the basics of these three will put you on a much better financial track than you were before.

By understanding how each component works, you’ll be able to avoid the common pitfalls so many others don’t avoid such as debt, credit fraud, and high interest rates.

Debit or Credit?

Plastic is a way of life for many people. On average, people have one debit card and three credit cards according to this data.

While there are tools to help you build your credit score, it can often be dangerous and makes it easy to justify living beyond your means.

It’s best to have one debit card and nothing else if you don’t feel that you can refrain from carrying a balance on your credit. If you do have a credit card, it should only be used for significant purchases.

Always make sure you pay your credit card bill off at the next billing cycle. This is going to help you stay out of debt and protect your scores. Most financial experts believe that is the best method.

Of course, to build a credit history, you’ve got to have a credit card or personal loan. A credit can help you learn about your spending habits but so can a debit card.

A debit card is designed to use money from your bank account. It isn’t loaned to you and doesn’t get paid back which prevents you from overspending.

One issue with credit is that these cards often have high interest rates. Therefore, it’s essential that whatever you put on the card can be paid off when the next bill is due. Otherwise, you rack up a lot of money to pay back and are paying more on the interest than the principal.

Debt

Debt may be a part of your life now, but it doesn’t have to keep you from being financially literate. Lesson #1 is to make sure you don’t carry credit debt.

Students are likely to have a student loan or two to pay off. Try to pay those off as quickly as you can once you graduate or look into ways to go to college for free.

With time, you’re going to have a mortgage and sometimes a car loan. Some consider these good reasons to get into debt.

When you establish a credit history, your financial track record may get you better rates and terms for these loans. The issue is that to get to that point, you would have to have a credit payment that you make on time each month so that it establishes that.

I actually do not recommend people take money out for a car loan. Often times, people spend $20,000 or more on a car that is rapidly depreciating in value.

Instead, save up and pay cash for a modest, low maintenance car. Really no one cares what you drive and people spend most of their wealth building years with car payments.

Owning a Business

While owning a business isn’t necessary for financial literacy, many people jump into business without knowing how to run one properly.

Business financial needs are going to be very different from personal finance. Contrary to what many people say, debt is not required for getting started.

If you don’t have the startup money needed, you shouldn’t start the business yet. You’ll end up financially stressed which will cause to to make business decision based out of desperation rather than the long-term implications.

What most people don’t realize is that their business debt is actually their personal debt. If the business goes under, the debt falls on their shoulders.

Use financial smarts and ensure that you’re not overspending. Cutting costs for your business will actually benefit you. This means you’ve got more money coming in, which means it can be reinvested in the company and outside it.

Retirement

Now is also the time to think about your retirement. Regardless of your age, your financial obligation doesn’t stop when you can’t work anymore.

Consider moving part of your savings to a 401k or another retirement fund. This is going to ensure that you protect your investments and have enough to live off of when you’re older.

Many companies HR teams offer guidance on setting up a retirement plan. Some companies even offer 401k matching which is essentially free money going towards your retirement.

Look Toward The Future

Though you may not be thinking of retirement right now, it’s never too early to start. Between then and now, you might get married, start/raise a family, go back to school, send your kids to school, and so much more.

Make sure that you’re focused on your portfolio and check it every three to five years to make sure that you’re on track for your goals. Meeting with a financial planner is another great way to make sure you’re on track.

Where Can I Learn Financial Literacy?

You can learn a lot about personal financial literacy on your own through self teaching. You may not realize it but you’ve been learning about it in bits and pieces your entire life.

Take the income you make, save as much as you can, cut expenses where possible, and live frugally. It’s not always going to be easy, but even if you have a few short months, you’ll adjust and do better the next month.

This is a financially free way to live life so that you can save for retirement and keep out of debt. Your financial future and that for your family depends on what you do now.

Of course, financial literacy is becoming so essential that many classes are available online. Some high schools and colleges now offer it. Now might be time to take a course or do more research on what you can do to protect your money and have a substantial nest egg on which to live.

Steffa Mantilla round headshot
Steffa Mantilla

Budgeting & Debt Payoff Expert

Steffa is the founder behind Money Tamer. After paying off over $80,000 in debt through budgeting, she now teaches families how to get their own finances in order. Steffa’s background in operant conditioning and behavioral husbandry has given her an understanding of motivation and motivators. She uses this training to help people understand the reasons “why” behind their money behaviors and how to successfully change them. You can learn more about her here.

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