According to the Financial Literacy and Education Commission, financial literacy is “the ability to use knowledge and skills to manage resources effectively for a lifetime of financial well-being.” If that felt like a mouthful, an easier way of understanding financial literacy is to break it down into these five components:
Earn—this goes beyond your take-home pay each pay period. It’s wise to have an understanding of your salary, benefits, deductions and withholdings. Review the fine print of your paystubs, and be sure to take advantage of all the credits and deductions available to you to help lower your taxes. Once you have an understanding of your monthly income, you are ready to spend (responsibly, of course).
Spend—you’ve heard it time and time again… you need to have a budget—but it’s true. Having a budget puts you in the driver seat of your finances. It’s not just a plan for how you want to spend your money, but also the most useful tool for achieving your financial goals. Start here with a simple calculator or use tools within Online Banking such as My Money Manager.
Save and Invest—while spending and earning are more immediate ways of seeing your money, saving and investing prepare you for the long term. Having long-term financial goals helps you budget beyond your day-to-day needs. Those goals should include an emergency fund, planning for retirement, saving for big purchases and paying off personal debts.
Borrow—borrowing isn’t inherently bad and actually has many positive impacts. Using credit wisely can increase your credit score and assist with major purchases such as an education, car, house or even unexpected expenses. Shop around for the loan option with the best Annual Percentage Rate (APR), and be sure to pay all bills on time to ensure you stay in charge of your credit history (and not vice versa).
Protect—when it comes to your money, you can never be too careful. It’s up to you to understand your financial situation. Saving for an emergency, purchasing insurance, monitoring your credit, being vigilant about identity theft, and managing your financial records should become routine habits.
How to Assess Your Financial Literacy
Ask yourself the following questions:
• Do you know how to create a personal budget?
• Do you have an emergency fund that covers at least three months of basic living expenses?
• Do you have a plan for retirement?
• If you have debt, do you have a plan to pay it off?
• Do you know your credit score and how to improve it?
If you answered no to one (or more), don’t worry. We’re here to help every step of the way. Being empowered to make good financial decisions is something every adult needs. Contact a local banker today to take the right steps to set yourself up for healthy financial well-being.