How to Improve Your Financial Ability

Making and managing money can feel overwhelming if you don’t have the financial ability or tools to help you.

Many people are not taught how to be financially literate or even taught how to learn about money. And because of these outcomes, there is financial literacy crisis that many people face today.

However, it doesn’t have to be this way. There are simple steps anyone can take to increase their financial ability, and they can start today.

What is Financial Literacy and Why is it Important?

Defining financial literacy is simple. Financial literacy means that you understand how to manage your money and make smart money choices. That’s it. 

Sadly, as mentioned above, most people don’t understand how to manage their money and make those smart money choices. Simply, they lack financial ability because they don’t have access to the right financial literacy tools.

According to CNBC, 20% of Americans don’t save any of their annual income. On top of that, people who do save don’t save enough of their money. According to Forbes, 44% of Americans don’t even have enough money to cover a $400 emergency. These are scary figures.

However, once you are financially literate, you will be able to set money goals like saving for retirement or even be able to build your wealth by investing in the stock market.

Below, we will explore a variety of financial literacy topics so you can have the proper financial literacy tools to prepare for your future.

The 6 Key Financial Literacy Topics

In order to become financially literate, you must understand the key fundamentals. According to the Financial Literacy and Education Commission, those fundamentals are: earn, spend, save, invest, borrow, protect.

EARN

In order to increase your financial ability, you must first understand your income. If you’re like most working people, you receive a paycheck(s) with the same amount each month. But if you had to take a close look at your paycheck, would you know what any of it means, besides the total amount that is deposited into your account?

Here, I’m talking about your gross vs. net income, your employer-sponsored health care deductions, taxes, and any amount that may be allocated to a retirement plan.

These factors are important for two reasons. The first is that it helps you understand your income so you can budget and allocate your bills, savings and investments. Second, once you fully understand your income, you can find ways to increase your retirement accounts or even tax-deferred savings accounts to help you in the future.

SPEND

The next step in increasing your financial ability is understanding exactly how to spend your money and see where it’s going.

Now, there are many financial literacy tools for creating a budget. It can be as simple as opening an Excel file or even an app that allows you to enter in your financial goals so that it can create that budget for you.

Having a budget allows you to closely look at what you are buying so that you can adjust your spending. In your budget, you need to make sure to include:

●      Your income.

●      Expenses that happen month like water bills, rent or a mortgage, car payments or student loans.

●      How much you want to put in your savings. It’s crucial that you always make sure to pay yourself first so you make saving a habit.

After creating a budget, and allowing a month or so to pass, look back at how you are truly spending your money. Are there places you can cut your spending? Areas you can contribute more to savings?

Following your budget will not only allow you to manage your spending habits, but it will also let you understand your bills, debt and savings as well as better understand your short term and long term financial goals. The most important detail is to make sure that you’re honest with yourself on where you are spending your money.

SAVE

If your financial ability is determined by how well you can follow a structured framework for your personal finances, then understanding what you’re saving for and exactly how much you need to save is crucial.

The first step to saving is setting goals and prioritizing where your spending is going. This step happens before you set a budget. Your savings and financial goals will depend on your individual needs and circumstances, but it should include learning to save for the following:

• An emergency

• Retirement

• Paying down bad debt

• A big purchase

INVEST

Investing for the future puts your financial ability to the test. When you learn how to properly invest and see what strategies work for you, the amount of growth you will see is huge.

Just keep in mind, investing for the future is far more important than investing for the moment, and the outcomes are drastically different.

Investing in Your Future: Saving for retirement is one of the biggest areas you need to invest in for your future. This means setting aside money in a 401(k) account if your employer offers one. If your employer offers a match to your 401(k), make sure that you take the maximum amount. It’s essentially free money, and it will go a long way building your nest egg for retirement.

If your employer doesn’t offer a 401(k), think about opening up an individual retirement account, or an IRA. This account allows you to have a variety of different stocks or commodities.

[If you’re interested in investing in the stock market, there are ways to find stocks that offer great returns. Subscribing to newsletters is one good way to find good stock recommendations if you aren’t sure what the best investment options are available to you. DIYwealth offers one of these services, and you can sign up here.]

BORROW

Here’s where your financial ability will be put to the test. Why? Because borrowing or understanding loans, credit card spending, and more can mean the difference between building significant wealth and going bankrupt.

This factor may be the most misunderstood financial literacy topic. Why? It could be the lack of proper guidance or simply the lack of self-control when it comes to spending habits.

Nevertheless, as you understand exactly how borrowing works, it’s crucial that you understand your credit score as well and how important it is to have a good score.

When you have a good credit score, it will allow you to get the best interest rates on loans and credit cards. Your credit score is based on your credit history. A good credit score ranges between a FICO score of 300 to 850. If you have a high credit score it means that you are less of a credit risk.

Understanding your credit score can help you be more aware of what lenders see. It can also help you understand your overall position. Plus, being aware of your credit score allows you to see if there is inaccurate information that needs attention.

PROTECT

Once you have a full understanding of the key financial literacy components (earn, spend, save, invest, borrow) it’s time to learn how to keep all the moving parts oiled and working. In order to protect your money, you’ll need to stay consistently vigilant of your budget and spending.

Another component to this is having the ability and awareness to protect yourself from fraud. This means keeping a sharp eye on your bank and credit card statements and making sure all those purchases and payments have been made by you and only you.

If you want to keep building your wealth and your financial ability, there are so many tools available to you like books, podcasts and even newsletters. DIYwealth sends out a newsletter every Friday to help you on your wealth building journey.

Remember, you have all the power in managing your finances, and it’s well worth your time to invest in your financial future.