Financial literacy is an important topic for people of all ages. Being able to understand how to manage your money and budget are essential to lifelong success. In the U.S., many students go through school without any formal training on handling personal finances.
To fill these gaps, we can focus on a few crucial lessons we can share with our friends, family, and community.
It’s never too early to start the process of developing financial literacy for children. While having an in-depth conversation about complex economic concepts with your five-year old may not be feasible, there are ways to help instill financial values even in your children.
There are a number of financial apps that provide kids with a means to save for certain goals, like that new toy, and educate them along the way. Starting at a young age can help develop good financial habits as they get old enough to understand the concepts and can help carry these habits into adulthood.
Following a budget is at the core of building good financial habits. A budget helps show what is coming in every month and what is spent each month by type of expense. A budget can help differentiate between necessities; such as paying the rent or a mortgage, versus spending that can be eliminated if needed.
A budget can be done with an old-fashioned Excel spreadsheet or via one of the many budgeting programs or apps that are available. Whichever tool that you use, the key is ensuring that all information is entered and tracked. Looking at your monthly budget can help identify areas of spending that can be eliminated and also opportunities for saving.
Spending vs. saving
If you turn on your TV or browse the internet, there are continual ads for things to spend our money on. Cars, furniture, health and beauty, clothing, travel and a multitude of other things.
Avoiding the temptation to spend aimlessly is crucial. Budgeting and setting priorities can help you set goals for savings.
Many experts suggest people start with an emergency fund. A typical rule of thumb here is to have six months-worth of liquid savings available in the event of a job loss or an unexpected major expenditure, such as the need to replace your home’s air conditioner.
Beyond this, we all need to look at longer-term goals like funding our children’s education, saving for a down payment on a new home, and of course for retirement. For these and other goals, automating your savings can be an effective tool. Saving via a 401(k) plan is a good example. Contributions are deducted from your paycheck, there is no need to write a check and send it to the plan. The contribution is built into your take home pay, you never miss the money.
One of the biggest impediments to saving and attaining financial security are credit cards. There are ads seemingly everywhere for various credit cards touting different features. There is nothing wrong with credit cards, in fact if used responsibly they offer a level of convenience.
However, they can cause problems when they are used irresponsibly. Easy credit makes it easy to overspend. This leads to the inability to pay off the balance each month, which leads to high interest costs. These costs can add to the balance and lead to many people to accumulate huge amounts of credit card debt. Paying off this debt prevents saving for other goals.
Credit cards are great for larger purchases as long as you have the money to pay your bill in full within a month or two. Using a credit card can offer protections when making a larger purchase, such as on home improvement. Debit cards, which are essentially check cards, are more appropriate for everyday purchases like groceries that you would normally pay for out of your checking account.
Protecting your hard-earned money
With technology and many types of online accounts comes the risk of identity theft. This means that scammers are looking to steal your information such as bank account numbers, your Social Security number of other information they can use to steal your identity. This can lead to these scammers opening credit cards in your name, taking out a fake mortgage, and filing for unemployment benefits in your name.
There are ways to help avoid identity theft. Use strong passwords and two-factor authentication with your online accounts. Freeze your credit report with the major credit reporting bureaus. Don’t click on links contained in the fake emails we all receive. Overall be diligent.
In accumulating savings, there are several types of accounts to utilize. The basics are a checking account for current expenditures and a savings account to short-term savings. There are many options for both including banks and online options.
Beyond this, there are brokerage accounts for investing, as well as retirement accounts like your company’s 401(k) plan and an IRA for retirement savings.
Financial literacy is the key to building wealth. Teaching our children about money can help ensure that future generations can be fully independent. Building financial literacy for people at all stages of life is important. It’s never too late to learn good money habits.
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