Financial literacy is a crucial component of staying afloat in today’s world, but a shockingly low number of people are truly familiar with key financial topics. Just over half of adults in the US are considered financially literate, and nearly 70% of those familiar with 401(k)s don’t use them. 

If you’re among them, there’s no need to panic, but it’s important to get on track so that you can build a solid financial future. In this post, we’ll explore a few financial tips and concepts that everyone should know about, equipping you with the tools you need to manage your money with confidence.

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Why Financial Literacy Matters

Financial literacy empowers individuals to make informed decisions about their finances. Understanding concepts like budgeting and debt management can help you plan for the future, avoid financial pitfalls, and achieve your life goals. 

It can also help you determine which financial products and services are best for your unique situation. For example, if you’re a single person with limited financial needs, you may be able to manage your money through independent learning and research. On the other hand, if you’re raising a family, it may be useful to employ the help of a financial planner. 

Having a basic understanding of key money concepts can help you assess your financial situation and decide how to plan for the future. 

Understanding Budgeting

Budgeting is really the cornerstone of financial literacy and the bedrock upon which all other smart money-related decisions are made. An effective budget helps you track your income and expenses so that you live within your means. 

The 50/30/20 Rule of Financial Literacy

Experts typically recommend following the 50/30/20 rule for budgeting, which states that 50% of your post-tax income should be spent on needs, 30% should be spent on wants, and 20% should be saved or used to pay down debts. 

Say, for example, you take home $3,000 per month after taxes. Under the 50/30/20 rule, you would have $1,500 to spend on needs like housing and food. Say you also have some student loans you’re looking to pay off. After budgeting $600 for debt payments and savings, you would have $900 left at the end of the month for discretionary spending. 

While the 50/30/20 rule may not work for everybody, it’s a great place to start. You can always adjust things a bit if needed, accounting for your individual situation. 

Getting Started with Saving and Investing

If you haven’t already begun saving and investing, now is the time to start. Savings provide a safety net in case of emergencies, and investing allows your money to grow over time.  You can start by building an emergency fund of three to six months’ worth of living expenses. 

Once you’ve built a solid safety net, consider starting an investment portfolio. Experts advise spreading investments across different asset classes through diversification––this helps minimize risk. Different types of assets perform differently under various market conditions, so it’s important to balance the potential for high returns with the stability provided by safer investments.

It’s best to start investing as soon as possible to take full advantage of compound interest. The underlying principle here is that the longer your money sits in an account, the more interest it will accumulate over time, maximizing wealth.

Managing Debt to Achieve Financial Literacy

Debt is a part of life for many people, and the problem is growing. Here are some key findings from MarketWatch to help illustrate the seriousness of America’s debt crisis: 

  • US household debt increased by 4.8% from November 2022 to November 2023
  • Roughly 1/3 of Americans expected to go into debt for holiday shopping in 2023
  • Around 1/4 of those studied were still working to pay off 2022 holiday shopping debt

The good news is, with the right strategy, you can tackle debt and get on top of your finances. While certain loans (such as mortgages) are key to getting ahead and building credit. Other forms of debt (like high-interest credit cards) can be financially crippling. Consider what forms of debt you’re willing and able to take on. Prioritize paying off existing debts. 

The Snowball Method of Financial Literacy

One of the best ways to pay off existing balances is by using the Snowball Method, where you eliminate debts from smallest to largest. In doing so, you gain momentum, much like the way a snowball travels down a mountain. Once you’ve knocked out the smallest debt, you roll the minimum payment you were making on that debt into the next one in line. 

Make Financial Literacy a Goal

Not everyone starts out with the right financial tools, and that’s okay. By embracing ongoing learning, you can set yourself up for a brighter future. Get started with these key financial concepts today and see the difference they make in your life.

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