Money is present in many aspects of our lives, and that makes financial literacy an essential life skill. Financial literacy is understanding and knowing how to manage your money. This knowledge empowers individuals to make informed decisions about their finances.
Whether you want to get out of debt, start investing, or simply gain better control over your finances, understanding key financial principles is a must. In this article, we’ll look at five practical ways to improve your financial literacy and build a foundation for financial stability, from free financial literacy classes to learning the basics of investment.
1. Learn How to Budget
Jumping into a budget can feel like a big step, but it doesn’t have to be. Even a little bit of budgeting knowledge can go a long way. A well-structured budget is the cornerstone of financial stability. Without one, it’s easy to overspend, accumulate debt, or lose track of where your money is going.
To create a budget that works for you, start by tracking your income and expenses. You can use a budget calculator or designated app to help you lay everything out. How much are you making—list income from your job and other forms of income like insurance payouts or investments. Next, list fixed expenses that are unlikely to change from month to month—rent or mortgages, auto or student loan payments, insurance payments, and so on. You should also list necessary expenses whose amounts might fluctuate, such as groceries, utilities, and car upkeep.
Once you balance your income against your necessary expenses, what remains is how much you can spend on fun things that might not be necessary, such as video games, gifts, going out to eat, or nice clothes. It’s important to treat yourself when you can, but remember, it shouldn’t come at the expense of your long-term financial health.
A commonly used budgeting model is the 50/30/20 rule. Under this basic budgeting principle, you allocate 50 percent of your income to needs (shelter, food, transportation, and such), 30 percent to wants (nights out and other fun treats), and 20 percent to paying off debt or savings accounts.
This is just a starting point. Everyone’s budget is a little different, and you should create a plan that works for your unique situation.
2. Understand Your Credit
Your credit score and credit history play a major role in your financial well-being. They impact your ability to secure loans and credit cards or even rent an apartment.
Credit scores are based on five factors: amount of debt, length of credit history, credit mix, payment history, and new credit (credit you’ve recently applied for). Scores range from 300 to 850, with higher being better. A higher credit score and better credit history can improve your chances of getting approved for loans with more competitive interest rates and terms. Poor credit, on the other hand, can negatively impact your chances of getting a loan, renting an apartment, and so on.
You should be aware of your credit score and check your credit report periodically to ensure there are no errors and that the details are up to date. Each year, you are allowed one free credit report from each of the three reporting agencies. This won’t affect your credit score, and you can keep track of where your credit stands.
If your credit score is low, there are a few steps you can take to help improve it. It’s important to pay your bills on time and not fall delinquent. Paying down your debt will also help. Even if they’re paid off, don’t close old credit accounts—a long credit history helps your score. Avoid applying for new credit, as each application requires a credit check, which can negatively affect your credit score.
If you need to build credit, consider getting a credit card that you put some percentage of all monthly purchases on and pay off every month. Capital Credit Union’s Secure Card is designed to help members both improve and build their credit with much lower risk.
3. Learn How to Invest
Investing can be intimidating. However, it’s a great way to make some recurring income through dividends and also an excellent method for saving for retirement and growing your wealth over time.
Contribute to retirement investment accounts. A 401(k) or IRA is a way to grow your wealth for the long term, offering tax advantages in addition to long-term growth potential. Often, employers will match your retirement contributions, so don’t miss out on this benefit if it’s available.
Start with low-risk investments. Options like share certificates and money market accounts allow investors to grow their money through dividends and interest and get some investment experience under their belts with very little risk.
4. Take Advantage of Free Financial Literacy Classes
Clicking on this article is a great start, but a teacher who can answer your individual questions is even better at helping you achieve financial literacy. Free financial literacy classes can go into much more detail than we can in a single article, and they’ll cover essential topics like budgeting, debt management, investing, and retirement planning.
If you’re in the Green Bay or Fox Cities region of Wisconsin, consider taking free classes through Capital Credit Union or utilizing our Financial Education Program. We aim to educate our members in all parts of financial literacy and love to see your finances thrive. If you aren’t in our area, don’t worry. There are other great financial literacy classes and programs available online, like through Khan Academy.
5. Try to Develop Strong Financial Habits
Developing financial literacy isn’t just about learning. It’s about applying what you’ve learned. And the best way to apply something is to make it a habit that you do regularly. We’re not saying that you need to live your life counting every penny you spend—that can be overwhelming and difficult to maintain. But you should try to get in the habit of living a financially savvy life. Here are two easy things you can start doing right now:
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Set clear financial goals. Do you want to save for a home? Plan for retirement? Pay off a credit card? Having a goal in mind beyond “I want money” can keep you motivated.
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Automate savings and payments. Setting up automatic transfers to savings accounts and automatic bill payments can ensure you’re always building a nest egg and never missing a deadline. You might also want to consider signing up for a program that rounds up your debit card purchases to the nearest dollar and automatically deposits the extra into your savings account, such as CCU’s Change Up option.
Improving your financial literacy is a lifelong journey, but by taking small, consistent steps, you can be more confident with how you’re managing your money. From budgeting and credit management to investing and taking some free financial literacy classes, there are plenty of resources around to help you succeed.
Learn more about financial education at Capital Credit Union and start growing your financial literacy today.