8 Essential Components of Financial Literacy
Thursday, April 23 CCCU
Money Education: 8 Key Components of Financial Literacy
Becoming financially literate requires taking a few essential steps towards improving your financial education. Here’s how to become financially literate!
For many, the topic of personal finances is confusing and often overwhelming — and these feelings are more common than you may think. In fact, only about half
of Americans are financially literate, which highlights the need for many of us to develop more education around how we use our money.
If interest rates, 401(k)s, inflation, taxes, and net income are foreign concepts to you, don’t be too hard on yourself. Our Portland credit union is dedicated to helping members feel confident about their finances, which is why we’re breaking down the eight key components of financial literacy to help enhance your financial education.
What is financial literacy?
If you’re not sure what financial literacy
means, that’s OK! Financial literacy, by definition, has a specific focus on your personal finances that helps you manage your money through various skills, budgeting, and personal finance management techniques. Essentially, a financially literate person has a basic understanding of the primary aspects of money management that helps us grow our money and keeps us out of debt. It’s a skillset many of us have, but perhaps lack the tools that help us actually execute it appropriately.
First, it’s all about having a thorough grasp of your personal finances
. That way, you can set and achieve your goals and make smart monetary decisions for life. When you get to know the following concepts, you’ll be on your way towards becoming financially literate. Here’s how to become financially literate:
1. Calculate your monthly income
The first component of financial literacy is calculating your net monthly income, which is how much money you take home after taxes. This may include your salary or wages, funds from a side hustle, tips, bonuses, and any passive income such as rent payments.
2. Set and stick to a budget
Setting and following a monthly (or weekly) budget is fundamental for maintaining your money and taking the next step towards becoming financially literate. About three-quarters
of U.S. households set a budget, but surprisingly, only 25% of people think it’s necessary. In any case, budgeting keeps you accountable with your money and helps you avoid going into debt. Plus, with so many available budgeting apps, it’s super easy to do in today’s world.
3. Account for all bills and know where your money goes
Tracking your expenses and purchases goes along with the notion of budgeting. The good news is you don’t have to create a complicated spreadsheet with a bunch of different formulas. Most budgeting apps also track all your bills and day-to-day transactions. This will help you reflect on what you spend your money on, which might encourage you to cut back on unnecessary expenses. Some also follow the 50/30/20 rule or a minimalist budget
that helps them stay on track with their money.
4. Prioritize saving or start an emergency fund
Part of your budget plan and financial education should be to set aside a little bit of money for an emergency fund every time you get paid. An emergency fund is a critical component of your financial health
. If you end up in a bind, you won’t need to go into debt to get out of the situation you’re in. You’ll never regret saving money knowing that you have the resources to address an unexpected event! Trust us.
5. Understand how to use a credit card
Sometimes, credit cards get a bad rap. But it’s mostly associated with the consequences of irresponsible use, high-interest rates, and hefty fees. Becoming financially literate will aid you in your journey towards responsible card usage and knowing how to use one. Responsibly using a line of credit
can also boost your credit score without drowning yourself in debt. With the low-APR Visa cards
from our Portland credit union, you’ll pay no annual fees and earn rewards with every purchase.
6. Protect your identity and make sure your account information is secure
In the digital age, identity theft and internet fraud are extremely common, so keeping your information secure is an essential step to take when thinking about financial literacy. There’s nothing wrong with shopping, banking, and paying bills
online. That said, it’s important to use caution with the information you share digitally. Change your passwords often and keep close tabs on all your Portland credit union accounts or the personal checking accounts you have elsewhere.
7. Learn about your credit score
Becoming financially literate means educating yourself about your credit rating. Remember, credit scores fluctuate as often as every week. While you might not know yours down to the exact digit, we recommend checking it at least once a month. On top of that, get to know the various factors that impact your score, such as your utilization ratio, payment history, account mix, and hard inquiries that could negatively affect your rating.
8. Start saving for retirement
It’s truly never too soon to start saving for retirement. In fact, if you haven’t started yet, you might be behind — but don’t panic! If your employer offers a 401(k) matching program, we recommend signing up ASAP. If not, look into opening an IRA or Roth IRA
on your own. While the idea of retirement might seem like a far-off dream, it’s best to embrace the concept of delayed gratification to secure a better financial tomorrow.
The Benefits of Financial Literacy
You don’t need to be a master at each of these financial literacy components right away. With that said, now that you know the benefits of financial literacy, you might be motivated to spruce up your personal finances. At CCCU, we believe in simplifying personal finances by providing convenient and accessible banking solutions. Join
our Portland credit union today, or contact us to learn more.