A lack of financial literacy can cost you money. On the other hand, too much is unnecessary unless you want a career in finance. The sweet spot is somewhere in the middle, where you know enough about what’s going on to make informed decisions for your everyday life.
Let’s take a look at five ways to do just that.
1. Develop a budget
To gain control over your finances, it’s essential to develop a budget. That means tracking your income, expenses, and savings. Tracking your income means paychecks, investment income, and other sources of earning. Tracking your expenses includes tracking daily expenses as well as using a personal income tax calculator to put money aside for taxes. What’s left is your savings, which (hopefully) go up over time.
2. Know the difference between debit cards and credit cards
Although both are plastic and fit in your wallet, there are huge differences between the two.
Debit cards are directly linked to your checking account, meaning you can’t use more than you have. This is helpful in that you can’t overspend and get into debt. However, it also doesn’t allow you to build up a credit history or credit rating to secure better loans in the future. Credit cards can help you with that.
Credit cards allow you to borrow money from a bank in order to make purchases you don’t necessarily have the money to cover. If you have a huge expense to pay, this can be helpful in the short term. If you’re impulse buying all the time, however, credit card use will quickly lead to debt.
3. Learn some basic investment advice
The basics of investing take a little time to learn. However, the rewards are immense. Through the magic (well, math) of compound interest, investments allow your money to make more money for you. All you have to do is know where to put it.
Each investment product comes with a different set of risks and returns, so it’s important to understand your needs before investing. Generally, bonds are a safe form of investment, providing low risk and low return, whereas stocks are more volatile, providing higher risks and higher returns. Most beginners opt for investing in an index fund rather than individual stocks because it gives you an easy way to own a small piece of multiple companies.
4. Open a bank account
Putting your money in a bank is generally far safer than hiding it under a pillowcase. Also, most US retail banks are insured by the Federal Deposit Insurance Corporation (FDIC). So, if the bank fails, your money is safe for up to $250,000.
Most people open either a checking account, a savings account, or both. The checking account is for everyday expenses. You can put money in and take it out as often as you’d like. Savings accounts are usually for emergency funds or expensive short-term purchases such as a car. Usually, they offer a low-interest rate and limit the number of transactions per month.
5. Listen to podcasts and read books
The great thing about financial literacy is that nearly everyone depends on money in one way or another. That means there’s plenty of educational content geared toward helping people understand finance better. If you enjoy podcasts, consider listening to finance podcasts. If you’re a reader, check out finance classics such as Rich Dad, Poor Dad, and The Intelligent Investor.
With these five tips in mind, you can continue to build your financial literacy and, in turn, your financial freedom.