We know that the earlier you learn the basics of how money works, the more confident and successful you’ll be with your finances later in life. It’s never too late to start learning, but it pays to have a head start. The first steps into the world of money start with education.
Banking, budgeting, saving, credit, debt, and investing are the pillars that underpin most of the financial decisions that we’ll make in our lives. At Investopedia, we have more than 30,000 articles, terms, FAQs, and videos that explore these topics, and we’ve spent more than 20 years building and improving our resources to help you make smart financial and investing decisions.
Financial literacy is the ability to understand and make use of a variety of financial skills, including personal financial management, budgeting, and investing. It also means comprehending certain financial principles and concepts, such as the time value of money, compound interest, managing debt, and financial planning.
Achieving financial literacy can help individuals avoid making poor financial decisions and help them become self-sufficient and achieve financial stability. Key steps to attaining financial literacy include learning how to create a budget, track spending, pay off debt, and plan for retirement. Educating yourself on these topics also involves learning how money works, setting and achieving financial goals, becoming aware of unethical/discriminatory financial practices, and managing financial challenges that life throws your way.
Here are other important concepts you should understand to be financially literate:
1. Budgeting: A budget is a plan for how you will spend your money. It helps you to stay on track with your finances and avoid overspending. There are many different ways to create a budget, but the key is to be realistic about what you can afford.
2. Saving: One of the most important things you can do for your financial future is to save money. You can save for short-term or long-term goals, such as saving up for a down payment on a house or investing for retirement. There are many different ways to save money, so find one that best suits your needs.
3. Debt management: Debt can be a helpful tool when used responsibly, but it can also be a burden if it becomes too expensive. It is important to understand how to borrow money and how to repay your debts in a way that works for you.
4. Investing: Investing is the process of putting money into assets or investments with the hope of earning a return on that investment. There are many different types of investments, so it is important to do your research before investing your money.
5. Insurance: Everyone should have some form of insurance, whether it’s health insurance, car insurance, or homeowners insurance. Insurance protects you financially in the event of an unexpected accident or illness.
6. Retirement planning: Retirement can be a long way off, but it is important to start planning for it now. If you don’t have a retirement plan, you may not have enough money saved up to support yourself when you retire. There are many different ways to save for retirement, so find one that best suits your needs.
These are just a few of the concepts you should know in order to be financially literate. By understanding these concepts, you can make better financial decisions for yourself and your family.