Back in March of 2004, a Senate resolution was passed designating April 2004 as Financial Literacy Month. According to FinancialEducatorsCouncil.org, every year the Senate votes on this resolution which states: “…that the President issue a proclamation calling on the federal government, States, localities, schools, nonprofit organizations, business, other entities and the people of the United States to observe the month with appropriate programs and activities.”
Wow… that’s quite a proclamation. So now that we know when Financial Literacy Month began and what the proclamation entails, let’s talk about what Financial Literacy is and why it’s so important.
Financial Literacy Defined
To make it easier to understand Financial Literacy, let’s use an analogy revolving around physical health. When trying to get (or stay) healthy, we need to do research. For instance, what foods are best for our individual bodies? What exercise routines should we consider? What supplements should we invest in to help us feel our strongest? Typically, we learn as much as we can about ourselves and our bodies before making any decisions that could impact our physical health.
The same holds true for finances and financial health. We need knowledge and skills that enable us to make informed and effective decisions with our money. Our financial future is determined by our ability to manage personal finances efficiently – from investing and insurance to paying for college, budgeting and retirement. The more information and understanding we have to successfully manage our money, the more Financial Literacy we have.
Four Steps to Financial Literacy
There are numerous ways to enhance and increase our Financial Literacy. The top four listed below not only help us reach the goal of better educating ourselves about money, but they can also be used to get our monetary situation back on track immediately.
Create a Budget.
Add up all of your monthly after-tax income and subtract your monthly expenses. (By the way, those monthly expenses should include savings and investments since Financial Literacy involves looking toward the future and planning appropriately for retirement.) Once you get the final number, you can plan your spending, limit your overspending and cut back on the items you don’t need. Budgeting is crucial to both properly managing your finances and learning how to make effective money decisions. Use myFICO’s budget calculator to help you get some of the more detailed numbers you need to make these decisions.
Track Your Spending.
There’s no doubt that after you (and every member of the family) make the commitment to track your spending, it’ll be an eye-opening experience. By keeping your receipts, tracking your online spending (online bill pay, shopping, credit/debit card transactions, etc.) and keeping records of all miscellaneous costs, you’ll probably start to notice spending habits you didn’t know you had. Be sure to total all spending at the end of 30 days and categorize the amounts (i.e. groceries, clothing, fuel, restaurants, entertainment, etc.). Now that you know where your money is going each month, you’ll have a better understanding of what you can do to enhance your monetary situation.
Pay off debt.
Learning about and taking control of your debt is a great way to increase your Financial Literacy. Basically, there are two types of debt: mortgage and consumer. Mortgage debt can include a primary mortgage, home equity loan or home equity line of credit. Consumer debt includes installment, credit card, auto and student loans. Consumer debt typically comes with a higher interest rate than mortgage-related debt so if you’re trying to decide between paying off debt or investing/saving money, review your numbers carefully. Once you come to terms with your debt, make a plan to eliminate it. Each month you stick to that plan, you’ll realize that Financial Literacy can also mean Financial Stability.
Plan for retirement.
Who doesn’t want to feel financially secure and comfortable when it comes time to retire? The sure way to get to that point is to learn all you can about investing and saving money before you retire. You can do that through online research, books, even a financial consultant who doesn’t so much manage your money as much as he or she coaches you on what investment strategies might optimally suit your current and future financial situation. By learning the ins and outs of stock portfolios, mutual funds, annuities, CDs and other investment products, you’ll learn things about money you might have otherwise missed.
The Importance of Financial Literacy
Over the past few years, financial trends have changed to such an extent that it’s more important than ever for every individual to have tighter control over their finances. And tighter control means improved understanding about how to properly manage money.
Think about it…
- Social Security, once a primary source of retirement income, now only provides enough money to barely “get by”
- People are living longer which means we need better retirement plans and increased funds for future expenses
- Traditional pension plans have been replaced with 401(k) plans and other programs requiring employee participation
- Financial market volatility swings up and down day to day, leaving us uncertain as to the true value of our portfolios
- The choice available to us for credit cards, mortgages, IRAs, CDs and other investment options are at an all time high
With so many decisions to make and so many options by which to make those choices, Financial Literacy is something that shouldn’t be put off to a later date. Today is the day to add to your Financial Literacy education – for the sake of your future and that of your family.
A great place to increase your Financial Literacy through advice, recommendations and the experience of others is at the myFICO forum. Check it out today!
Latest posts by Rob Kaufman (see all)
- Back to School Quiz: How Well Do You Know Your FICO® Score Facts? - August 15, 2017
- So, You Want to Cosign Your Child’s College Student Loan - August 10, 2017
- House Hunting? Beware of Potential Mortgage Scams - August 8, 2017
- How Will Rising Interest Rates Affect You? - August 1, 2017
- Errors on Your Credit Report? How They Happen and What You Need to Do - July 18, 2017