Definition, Importance and Key Principles of Financial Literacy

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If you have a job, you should learn about money. Financial literacy will help you prepare for the future, protect you from financial problems, and reduce your financial stress. Continue reading to learn more about financial literacy.


What Is Financial Literacy?

Financial literacy is the understanding and application of fundamental economic principles such as personal finance management, investing, and budgeting. Financial literacy is critical for making sound financial decisions, reaching financial goals, and planning for retirement. Financial concepts such as debt management, compound interest, interest rates, and financial planning are all understood by someone with strong financial literacy.


5 Key Principles of Financial Literacy

Consider the following five financial literacy pillars:


1. Earn

Knowing how much money you make is the first step toward financial literacy. This step is simple if you receive a regular paycheck. Your paycheck should include your gross net income as well as any applicable deductions, such as employer-sponsored health insurance and retirement savings.

Contractors, freelancers, and business owners should learn how to calculate their net and gross income based on previous earnings.


2. Save

Despite the fact that spending money is often the primary motivator for making it, saving money is critical to your long-term financial well-being. Open a savings account to create an emergency fund, save for retirement, and pay off personal debt (like student loans or credit card debt).

Consider saving to be "paying yourself first." You may not feel great right now, but you will thank yourself later.


3. Spend

Those with sound financial judgment budget their money in order to achieve their financial objectives. It's a good idea to make a personal budget to keep track of where and how much you spend.


4. Take a loan

Even the wealthiest people must borrow money to make large purchases, such as a new home or car. Borrowers with a credit history are frequently required by lenders. College students frequently rely on financial aid or student loans, so young people must understand the complexities of loan repayment.

Knowing how to compare loans, analyze a credit report, maintain a healthy credit score, and make loan payments on time are all part of good money management.


5. Protect

Protecting your income entails reviewing your bank accounts and financial statements on a regular basis to look for errors, discrepancies, or fraud. Most financial institutions provide protection services, but it's a good idea to understand how to review your own financial activity and history. You should also keep your financial information, particularly account numbers and passwords, secure.


Why Is Financial Literacy Important?

Financial literacy is essential for making sound financial decisions, staying out of debt, and planning for retirement. Because the global economic landscape is constantly changing, financial knowledge and skills are required.

For example, an increasing number of employers are shifting away from providing pension benefits and toward 401(k) retirement plans, which necessitate financial decision-making on the part of the employee. Employees must receive financial education in order to understand their social security benefits and retirement savings.


Examples of Financial Literacy

A person who is financially literate prioritizes their savings, limits unnecessary spending, lives within their means, and plans for the future. You are financially literate, for example, if you can:

- Maintain a steady flow of income into your checking and savings accounts

- Manage a monthly spending budget

- Rely on cash more than credit

- Pay all your credit card debt on time

- Regularly contribute to a retirement account.


How to Become Financially Literate

Here are five steps you can take to become more financially literate:

1. Create a financial budget. Budgeting your finances is the first step toward meeting your short- and long-term financial objectives. If you're stuck, consider downloading a budgeting app or researching budgeting strategies.

2. Open a bank account. When you open a savings and checking account at a bank or credit union, you will be able to use a debit card, making it easier to manage your spending. You can also get a credit card and begin building your credit history.

3. Know how credit scores work. Lenders use your credit score to determine the level of risk involved in lending you money. Credit scores range between 300 and 850. Making on-time mortgage payments and paying off credit card debt are critical to maintaining a healthy credit score.

4. Investigate investment strategies. You should first invest in your retirement and savings accounts before investing in the stock market. Learn more about the stock market and bitcoin.

5. Plan for emergencies. One of the most important functions of a savings account is to save for emergencies. You need a safety net in case you lose your job, suffer a natural disaster, or become ill or injured. As a young adult, you should open a savings account before taking on many "real world" responsibilities. It is, however, never too late to begin, and no amount is too small.

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