Financial Literacy: Know where and how to start

Nowadays, many people have a problem with money because of a lack of financial literacy. If the majority of the population had this knowledge, the number of people in debt would be small.

Therefore, it is essential that people understand and can apply financial literacy in their lives, in order to have more money and less debt.

In this sense, we have selected the main information for you to have a more stable financial life and not to compromise your life in the future.

What Is Financial Literacy?

This term is linked to a number of factors that together include: basic economics, home economics, investments, money mastery, and how the financial system works.

By acquiring this incredible skill set, you are able to have practical notions regarding what happens in your day-to-day life when it comes to money.

Difficult day-to-day situations, such as emergencies, debts, investments, and others, will become easier to solve, and even to avoid.

Check the following questions to find out where you are in financial education.

• Do I have a set budget based on my goals?
• Does my family know the advantages of having a savings program?
• Does my family know how to manage their spending and debts responsibly?
• Is my family financially protected in case of illness, accident, or disability?

With this, you will understand what level of financial literacy you are at. The less “Yes” you answer, the worse off you will be. However, move forward to learn how to structure it.

How Many People Are Financially Literate?

There is data and a lot of evidence on top that most people don’t know how to handle their money, being deficient in financial literacy.

According to the National Test of Financial Capability administered to over 17,000 people from all 50 states, it was reported that less than half (48%) of the participants were able to pass the 30-question test

Basically, this test involved subjects such as budgeting, paying bills, setting financial goals, and other topics related to personal finance.

Furthermore, the average test taker answered only 63% of the questions correctly, a very low number. However, people who have studied about personal finance and had basic financial literacy understood some topics very well, such as:

• How to pay income tax (87%)
• How student loans work (94%)
• What a 401(k) is and how it works (79%)
• How home, auto and life insurance works (90%)
• The difference between credit cards and debit cards (86%)

What are the types of financial education?

To begin to understand the basics of financial literacy, it is important to know the following terms:

• Income: basically it is the money that enters your pocket thanks to your work
• Savings: money that you accumulate in the bank for future objectives, with low profitability.
• Expenses: commitments, monthly bills that have to be paid promptly every month.
• Investment: your money circulates and generates benefits in the short, medium and long term.
• Borrowing: Your behavior regarding borrowing money. Having good debt allows you to have a good credit history, while bad debt can lead to bankruptcy.

Understanding these fundamentals is the first step, then you have to go to the second level, understand the following principles.

5 Basic Areas of Financial Understanding

There are some more advanced notions that you should also learn and, of course, always develop, which are:

1. Budgeting

This is basically everything that covers money coming in and going out of your home, your sources of income, plus fixed/flexible/discretionary expenses and monthly payment obligations.

2. Management of basic needs

It is essential that all expenses related to the necessities of life, such as housing and transportation, as well as monthly bills, are organized on paper or spreadsheet.

3. Banking

This is another interesting notion of financial literacy, in which you need to understand your accounts, how they work and the expenses that are charged, such as commissions or applicable conditions.

4. Debt management

You have to take on debts effectively, understanding the commissions that apply in the case of loans and the interest on credit cards. Always keep this understanding.

5. Retirement planning

All of the topics mentioned above make sense for this one. Having notions of financial literacy helps you have a purpose for your money, a direction, a destination to use in the future.

5 Steps to apply your Financial Literacy

From now on, you will see what you need to do, in fact, to get out of where you are today and start applying financial literacy while developing these notions, after all, in practice you learn much more.

Therefore, having an applied financial literacy and building a quality life, getting out of the endless cycle of expenses, debts and financial lack of control, this is the path. These are the 4 essential steps:

1 – Pay your debts

This will be your first step to start applying financial literacy and have a quality and very successful financial life.

There is no point in earning more in this first step, since your financial situation will remain the same. You will have to pay all or part of your debt and then proceed to the second step.

2 – Earn more money

Well, after you pay off your debts, focus on making cash. Look for a main source of income that pays at least your monthly expenses and shortly after look for alternatives for extra income to start making a monthly profit in your box.

When you have a monthly profit, after achieving an extra amount in your account, you can go to the third step to apply financial literacy.

3 – Save

The temptation to have extra cash can become your biggest villain, trust me. Most people, when they get to this stage, end up wasting the extra money on superfluous things, going back to step two and even step one.

So pay attention and save as much as you can. Close your hand.

4 – Invest your extra money

This step will give you a lot of financial autonomy, as well as being able to have sustainability if something happens.

We call the first level of investment “Construction of the emergency reserve”, which is equivalent to 6 months of the amount spent monthly on your home.

Once you have this amount invested in Fixed Income, which yields at least 100% of the CDI, think about varying your investments.

5 – Involve your family

Whenever you budget for the month, include household expenses, as well as those for your children, spouse, and even pets.

Make a list of all of them and see where the money goes. Show all of this to your family and make it clear that if everyone saves more than they spend, they will receive a prize.

This is one way to get competition in the house for everyone and help save money.

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