What Is Financial Literacy And Why You Need To Learn It

Many people are woefully uninformed when it comes to finances. The more you know about a subject, the easier it is to make good decisions. Unfortunately, since many people don’t understand much about personal finance, they end up making poor decisions. And these poor decisions have some nasty consequences.

Many people don’t have money set aside for an emergency. Others have debt that they likely will never pay off. And others are one missed paycheck away from losing everything.

All of those scenarios could be avoided if more people had what’s called financial literacy. The definition of which is simply understanding the basics of personal finance so you have a foundation on which you can build a stable life. 

In this article, I will go over the ideas behind gaining more financial literacy so you can make better financial decisions.

What are the fundamentals of financial literacy?

As we already mentioned, these are the basic understanding of how finance works and the principles behind it. Once you have a solid grasp of the basic things you need to know then you can move on and start researching things like the best trading platforms in Canada so you can put the lessons you’ve learned to use. 

Budget

An essential component of getting your personal finances together is to create a budget. In the process of putting a budget together you will learn exactly where your money is going. 

Tracking your money is the first step to putting a budget together. The key is to have everything you spent tracked and recorded. Every coffee, every bill and every time you make a payment to anything then it needs to be put on a spreadsheet or app. Then, make sure everything is categorized so you can see what areas you spend the most money and where you can logically trim the fat and reduce wasteful spending.

Before you even have the budget firmed up, you will be much more aware of when you spend money so you aren’t mindlessly shopping and spending money when you shouldn’t.

Once you have everything tracked, then you can see many areas where your money is being wasted. Then you can set out a budget where you place limits on any spending that is not 100% necessary.

Debt

Some debt is necessary and even in some cases a good thing. With lending rates very low, it makes sense to have some debt since it costs almost nothing to take it on. Things like a mortgage or business loan are these types of good debt.

However, if you take on too much of those good debts, it can be a problem. And what is really sinking many people is the fact that they have too much other debt which makes it impossible to save money.

Many people have car loans, student loans and maxed out credit cards. This can amount to over half of your salary. Which means that many life decisions are affected and can have a huge negative impact. Like taking on a job that you are underpaid for and over qualified to do but need to accept so you can pay off your debt. This can have a snowball effect that causes hardships all down the line.

How to become more financially literate

The first thing is to create a budget as we already mentioned. Getting your spending in order is very important.

While you do that, you need to then do some research on how to improve your finances. The first place to start is to look into paying down your debt. There are a lot of ways to do this and it will depend on your personal situation. For instance, when you come up with a budget and stick to it, you may find that you have a couple hundred dollars per month that can be put towards your debt.

Find the one that is going to be the fastest to pay off so you can claim a small victory and build off of it. Usually this will be a crest card that also usually has the highest interest rate. That makes it an ideal starting point. Once it is paid off then you’ll have even more money per month so you can then put it towards other loans.

Once you are getting ahead with your debt, then it is also time to look into ways to have your money make you more money. In other words, it’s time to start investing. Even something small like using an investing app can make you a few hundred dollars extra per year which you can then flip into bigger investments. You can buy index funds or even riskier investments that bring in even higher yields. 

And, you should always have some money going towards an emergency fund. You never know when you could get sick and miss work or even get laid off because of a bad economy. When you are financially literate, you are better able to avoid disaster when these types of scenarios come up. 

What happens next?

When you have a firm grasp of the concepts behind personal finance, you will be able to start acting in ways that you actually want and that make you happy. Maybe you can change jobs and do something that you are actually qualified to do instead of working at a dead end job just to pay the bills. Or, you could go back to school and get qualifications that get you a better job later so you can save even more money.

And best of all, you’ll actually be able to retire on time and enjoy your twilight years in style. When you actually have enough to retire on, you can do the things that you want to do when you retire. Otherwise, you may not be able to retire at all, and if you do you’ll have to make a lot of sacrifices to your lifestyle to make the money last.

There is absolutely no downside to becoming more financially literate.