A few years ago, I was deep in credit card debt, feeling like I’d never get out and achieve financial freedom. But, over time, I managed to clear that debt, take my kids on trips, and buy a car and a house for my family.
This change wasn’t due to luck; it required strict discipline and a commitment to learning how to manage my finances better. I picked up saving and earning tips and took advice from financial experts seriously. Financial literacy is a key part of self-improvement, and it’s something you can learn in your spare time—if you make time for it.
I encourage you to take some of the best personal development courses today which includes managing personal finances.
If you’re feeling stuck financially, this post aims to provide practical advice to help improve your situation.
How to Improve Financial Literacy
Improving your financial literacy is crucial in making informed decisions about your money. Below are expert tips designed to enhance your understanding and management of finances, incorporating calculations where necessary.
1. Understand your finances
Start by gathering a complete picture of your current financial situation. This includes all sources of income, debts, monthly expenses, savings, and investments. Use tools or apps to track your spending and identify areas where you can cut back or need to allocate more resources.
Here are a few apps to help you:
- You Need A Budget (YNAB): Ideal for those who want a hands-on approach to zero-based budgeting, encouraging users to assign every dollar a job, promoting intentional spending.
- Goodbudget: Uses envelope budgeting principles for those who prefer to plan their finances without linking bank accounts, requiring manual entry of transactions.
- EveryDollar: Offers a simple zero-based budgeting system, with a free version for manual entry and a premium version that syncs with your bank for automatic tracking.
- Credit Karma: Best for free credit monitoring and offers unique features like Instant Karma for cash reimbursements on debit card purchases.
Dylan Houlihan of Swift Salary shares a similar practical tip if you wish to improve your finances.
“One small habit that I picked up when I started focusing on improving my finances involves manually tracking your net worth every month. This simple activity has brought a ton of order and understanding to my finances, and it's helped push me further to achieving the financial goals I've set for myself.”
2. Budgeting
Create a budget that outlines your income versus your expenses. This will help you live within your means, save money, and avoid unnecessary debt. Use the 50/30/20 rule as a guide: allocate 50% of your income to necessities, 30% to wants, and 20% to savings and debt repayment.
Here’s an example for a monthly income of $5,000:
- Necessities (50%): $2,500 should be allocated towards essential expenses such as housing, utilities, groceries, and transportation.
- Wants (30%): $1,500 can be spent on non-essential expenses like dining out, entertainment, and hobbies.
- Savings and debt repayment (20%): $1,000 should be directed towards savings, investments, and paying off debts.
Kevin Thompson CFP®️, RICP®️ of 9i Capital Group LLC offers this advice.
“The first core financial management tip is to learn to live on less by saving a minimum of 15%-20% of your “gross” income. Once you begin doing that, we would like to see you accrue 6 months of expenses into an emergency account. Next, we want to make sure we have life insurance in place to protect our loved ones. Then finally, we can start to think about allocating dollars into investments by slowly dollar cost averaging into low-cost index funds.”
Learn more by checking these financial literacy online courses to keep your budget on track.
3. Emergency fund
Build an emergency fund to cover at least three to six months of living expenses. This fund can protect you from financial strain caused by unexpected events such as job loss, medical emergencies, or urgent home repairs.
4. Save and invest
Start saving a portion of your income regularly, no matter how small. Consider investing in stocks, bonds, mutual funds, or retirement accounts to grow your savings over time. Understand the risks and returns associated with each investment option.
Heather Quinn of The Northwestern Mutual Life Insurance Company believes that saving for retirement is a must.
“Prioritize retirement –it will be here sooner than you think and compounding is integral to building wealth.”
5. Debt management
Prioritize paying off high-interest debts first, such as credit card balances, to reduce the amount of interest you pay over time. Utilize strategies like the debt snowball or avalanche methods for efficient debt repayment.
The debt snowball strategy is a method of paying off debt that focuses on clearing debts from smallest to largest, regardless of interest rate. Here’s how it works:
- List your debts: Start by listing out all your debts from the smallest balance to the largest, excluding your mortgage if you have one. Interest rates are not considered in this order.
- Minimum payments on everything: Make the minimum payments on all your debts except for the smallest one.
- Extra payments on the smallest debt: Direct as much extra money as you can towards the smallest debt. The goal is to pay off the smallest debt as quickly as possible.
- Roll over payments: Once the smallest debt is paid off, take the amount you were paying on that debt (both the minimum and any extra payments) and apply it to the next smallest debt. This increases the payment on the next smallest debt, allowing you to pay it off more quickly.
- Repeat: Continue this process, rolling over payments to the next smallest debt each time one is paid off, creating a “snowball” effect.
As you eliminate each debt, the amount of money you can throw at the next debt increases, accelerating the pace at which you can pay off your remaining debts.
6. Credit score awareness
Regularly check your credit score and credit report to ensure there are no errors that could affect your borrowing capability. Understand the factors that influence your credit score, such as payment history and credit utilization, and take steps to improve it.
7. Financial education
Continuously seek knowledge on financial matters through books, podcasts, online courses, and workshops. Staying educated helps you make better investment choices and understand complex financial products.
Ian Rodda of Page One Formula understands the value of educating one’s self in terms of finances.
“I emphasize the need for financial knowledge in realizing a business's full potential. Begin by mastering cash flow management--understanding where every dollar comes from and goes is critical. Then, invest in understanding financial modeling; it's not just about managing current finances, but also anticipating future possibilities so you can make informed decisions. This method has been crucial in guiding our entrepreneurial clients to long-term growth and success.”
8. Insurance
Invest in appropriate insurance policies (health, life, auto, home) to protect yourself and your family from unexpected financial hardships. Regularly review your coverage to ensure it meets your current needs.
9. Retirement planning
Start planning for retirement early by contributing to retirement accounts such as 401(k)s or IRAs. Take advantage of any employer match programs, as they are essentially free money towards your retirement savings.
10. Seek professional advice
Consider consulting with a financial advisor to get personalized advice tailored to your financial situation. They can help with investment decisions, tax planning, and estate planning.
Remember that we all need to have an individual financial plan and only an expert can help you with such. Here’s an advice from Drew Parker of The Complete Retirement Planner.
“Every household, regardless of their net worth or stage of life, owes it to themselves to create a comprehensive, individualized financial plan. This is a crucial step in assessing your current and future financial health and acts as a roadmap to becoming financially secure. It helps you to establish realistic goals, understand the direct impact that current decisions have on long-term results, and to track your progress.”
Know the best financial advice for young adults from one of our posts.
11. Stay informed about taxes
Understand how taxes affect your income and investments. Use tax-advantaged accounts and strategies to minimize your tax liability. Keep abreast of changes in tax laws that may impact your finances.
Allie Petrova of Petrova Law has something valuable to share about paying your taxes.
“Pay your taxes on time and throughout the year if not subject to W-2 withholding as an employee. If you work for yourself as a consultant, contractor, or gig worker, you need to make quarterly payments of estimated taxes by certain deadlines. Pay every quarter because taxes can sneak up on you. Not having the cash set aside won't be a valid reason for penalty abatement.”
12. Setting financial goals
Set specific, measurable, achievable, relevant, and time-bound (SMART) financial goals. These could range from short-term objectives like saving for a vacation to long-term goals like buying a home or retiring comfortably.
13. Monitor and adjust
Regularly review your financial plan and adjust as necessary. Life changes, such as a new job, marriage, or the birth of a child, may require updates to your budget, savings, and investment strategies.
Other Expert Insights on How to Improve Financial Literacy
1. True Tamplin, Founder, Finance Strategists
“Setting up your bank account to automatically move a chunk of your paycheck into savings turns it into a non-negotiable part of your budget, just like your rent.”
2. Asher Rogovy, Chief Investment Officer, Magnifina
“One of the best ways to teach children financial literacy is by co-managing a real portfolio of stocks. With a custodial account (UTMA or UGMA), parents and grandparents can invest in stocks and bonds for a child while teaching about investing. Because the assets pass to a minor when they become an adult, it’s easier to keep the child engaged in learning about finance. These accounts can even be professionally managed by an RIA. There may even be additional tax efficiencies with UTMA or UGMA accounts, depending on one’s financial situation.”
3. Melissa Terry, CFA, VEM Tooling
“First off, automate your savings. This means setting up automatic transfers from your checking to your savings account each payday. It’s like paying yourself first and ensures you’re consistently building your savings. Another tip is to embrace minimalism. This means adopting a simpler lifestyle that not only saves you money but also simplifies your financial life. Before making purchases, evaluate them mindfully and focus on what truly adds value to your life.”
4. Jonathan Rodgers, CFA, BestDaily
“Investment is another crucial aspect of financial management. By diversifying your investments across stocks, bonds, and mutual funds, you can mitigate risks and enhance potential returns.”
Financial Trends in 2024
Improving financial literacy is crucial for making informed decisions about money management, investing, and planning for the future. Here are some financial trends that can help you enhance your financial literacy:
- Digital and mobile banking: The rise of digital and mobile banking offers convenient access to financial services, including budgeting tools, investment platforms, and real-time account monitoring.
- Fintech innovations: Financial technology (fintech) companies are revolutionizing the way we manage money, offering solutions for savings, investments, payments, and even cryptocurrency trading.
- Personal finance apps: Apps designed to help with budgeting, investing, and tracking expenses are becoming increasingly sophisticated.
- Financial education platforms: Online platforms offering courses, webinars, and articles on various financial topics are widely available.
- Robo-advisors and automated investing: Robo-advisors use algorithms to provide investment advice and manage your portfolio with minimal human intervention.
- Sustainable and Responsible Investing (SRI): There’s a growing trend towards investing in companies that prioritize environmental, social, and governance (ESG) criteria. Learning about SRI can help you align your investments with your values while still aiming for competitive returns.
- Cryptocurrency and blockchain: The emergence of cryptocurrencies and blockchain technology has introduced new investment opportunities and financial products. Educating yourself about the risks and benefits of these digital assets can be a valuable addition to your financial knowledge.
- Financial Independence, Retire Early (FIRE): The FIRE movement encourages saving and investing aggressively to achieve financial independence and the possibility of early retirement.
- Credit score management tools: With access to free credit score monitoring and advice on improving your credit score, individuals can better understand how credit works and how to use it to their advantage.
- Peer-to-Peer (P2P) lending and crowdfunding: These platforms offer alternative ways to invest or secure funding, bypassing traditional financial institutions. Understanding how they work can broaden your financial options for investing or raising capital.
Frequently Asked Questions
How do taxes affect my finances?
Taxes significantly impact your finances by reducing your take-home pay and affecting your investment returns.
By understanding your tax obligations and planning accordingly, you can leverage deductions, credits, and tax-advantaged investment options to minimize your tax liability and maximize your income.
This requires staying informed about tax laws and considering the tax implications of your financial decisions, which can ultimately influence your ability to save, invest, and achieve financial goals.
How do I set financial goals?
Setting financial goals involves a clear understanding of your priorities and what you wish to achieve, whether it’s saving for a home, preparing for retirement, or paying off debt.
Goals should be SMART. This process helps ensure that your financial actions are aligned with your personal values and long-term objectives, providing a roadmap for making informed financial decisions and tracking your progress over time.
What resources can help me learn more about personal finance?
There are numerous resources available for those looking to improve their personal finance knowledge, including books, online courses, podcasts, and websites dedicated to financial education.
Engaging with these resources can help you understand financial basics, explore complex investment strategies, and stay updated on financial trends. This continuous learning is essential for making informed decisions and effectively managing your money.
How do I choose the right financial advisor?
Choosing the right financial advisor requires careful consideration of your financial needs, the advisor’s qualifications, and their compensation model.
It’s important to select an advisor with the appropriate credentials, such as a Certified Financial Planner (CFP), who operates with a fee structure that aligns with your interests.
Additionally, ensuring that the advisor’s communication style and investment philosophy match yours can help in building a productive, long-term relationship.
How do I deal with financial stress?
Dealing with financial stress involves taking proactive steps to manage your finances, such as creating a realistic budget, building an emergency fund, and prioritizing debt repayment.
Seeking professional advice, exploring stress reduction techniques like mindfulness, and maintaining a healthy lifestyle can also contribute to better financial well-being. Addressing financial stress head-on allows for clearer decision-making and can lead to a more secure financial future.
Key Takeaways
This discussion has highlighted essential strategies for improving financial literacy, ranging from understanding your finances and budgeting effectively to managing debts and planning for retirement. The emphasis has been on practical steps such as setting SMART financial goals, utilizing financial planning apps, and embracing financial education resources. We’ve also touched on the significance of choosing the right financial advisor and methods to alleviate financial stress, underscoring the importance of proactive financial management.
Check out this article on the best financial practices for entrepreneurs.
Improving your financial literacy is not just about acquiring knowledge; it’s about putting that knowledge into action. We encourage you to take the expert tips discussed to heart and begin implementing them in your daily life. Start with creating a budget using the 50/30/20 rule, set clear and achievable financial goals, and educate yourself further on personal finance management. Remember, every small step taken today can lead to significant financial benefits in the future.
Consider taking courses offered by Skill Success All Access Pass. These courses are designed to equip you with the skills and knowledge necessary to navigate the complexities of personal finance confidently. From budgeting basics and debt management strategies to investment insights and retirement planning, Skill Success All Access Pass offers a comprehensive suite of resources to help you achieve your financial goals..
Disclaimer: This content is for informational purposes only and is not financial advice. Financial situations vary, so it’s important to do your own research or consult a qualified financial advisor before making financial decisions.
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