Written by: Joey Ruffalo, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
Financial literacy is the ability to understand and effectively manage your money. It is the foundation of financial success, and it's something that everyone should strive to achieve. Being financially literate means knowing 1) how to create a budget, 2) track spending, 3) pay off debt, and 4) plan for retirement. It means having the knowledge and ability to make intelligent decisions about your money and investments. Financial literacy is an essential part of life, and it's something that everyone should strive to learn. With the proper financial education, you can be on your way to becoming financially literate and reaching your financial goals.
What is financial literacy?
Financial literacy is an essential life skill that is becoming increasingly important today. Financial literacy encompasses the expertise, competencies, and self-assurance to make well-informed money management and debt choices. Financial literacy is the foundation of financial success; you can achieve it through financial education.
Financial literacy is the ability to understand how money works, how to create a budget, track spending, pay off debt, and plan for retirement. Developing financial literacy skills to become financially literate and secure a prosperous future is essential. Understanding the fundamentals of financial literacy is the first step in becoming financially independent and achieving financial security.
The 4 pillars of financial literacy
Financial literacy is the cornerstone of any successful financial plan. Being financially literate means having the knowledge and skills to make informed decisions about money, debt, budgeting, and retirement. It's essential to understand the four financial literacy pillars to succeed.
The first pillar is learning how to create a budget. A budget lets you track spending and ensure you have enough money to cover your expenses. The second pillar is monitoring expenditures, helping you stay on top of your finances and ensure you are not overspending. The third pillar is paying off debt. A plan to pay off debt can help you get out of debt faster and save money in the long run. The fourth pillar is planning for retirement. Planning for retirement is essential to secure a financial future.
By understanding and following the four pillars of financial literacy, you can become financially literate and make informed decisions about your money, putting you on the path toward financial success.
How to create a budget
Creating a budget is the first step to becoming financially literate. A budget helps you to track your income and expenses and plan for the future. Understanding where your money is going and how much you can save or invest is essential. To create a budget, you must track your income and expenses, set financial goals, and adjust your spending accordingly. Once you have a budget, tracking your spending and planning for retirement will be easier.
According to Credit.com, only about 30% of Americans have a budget. This is a concerning statistic, as budgeting is one of the most essential components of financial literacy. With a budget, individuals can effectively track their income and expenses, set financial goals, or plan for retirement. Additionally, not having a budget can lead to financial issues such as overspending and getting into debt. Additionally, a leading cause of divorce in North America is money fights and money problems. A budget allows you to be on the same page regarding saving and spending.
Tracking spending habits
Now that you have created a budget, you understand how much money you have coming in each month and how much is going out. This will help you know where your money is being spent and prioritize it, leading to the second pillar, tracking spending. Monitoring where you are spending your money and understanding where it goes can be done by reviewing your bank and credit card statements. Looking at these records will help you know where your money is going and make changes if necessary.
In addition to tracking spending, it also means having a plan for how to spend the money. Having a plan helps with budgeting and ensuring all expenses are accounted for. Without a plan, it is easy to overspend and get into debt. Additionally, tracking spending can help you save money by finding areas where you can cut costs.
Americans often overspend in specific categories, such as entertainment, dining out, and shopping. Entertainment often includes going to the movies, attending concerts or plays, and other activities. Dining out can consist of going to restaurants or ordering food. Shopping can include buying clothes, home goods, electronics, and more. Recognizing where you are spending your money will allow you to reallocate your spending more effectively, including savings and the third pillar, paying off debt.
Debt management strategies
Creating a budget is the foundation for financial literacy. It helps you understand how much money you can spend each month and how to allocate it between necessary expenses, savings, and investments. Tracking spending lets you stay on top of your budget and ensure you're not overspending. Paying off debt is essential to financial literacy, as it can help you save money on interest payments and free up more of your budget for other expenses.
There are several strategies for paying off debt. One of the most popular is the Dave Ramsey recommended "debt snowball method." This involves taking all your debts and arranging them from smallest to largest, then focusing on paying off the smallest one first, regardless of interest rate. As each smaller debt is paid off, you can roll that payment into the next largest debt until that one is paid off as well. A plan to pay off debt can help you get out of debt faster and save money in the long run.
The debt avalanche is a way to pay off debt. Put your debts in order from smallest to largest interest rate. You start with the largest interest-rate debt and pay it off first. Then add that money to the payment for the next highest interest rate debt and keep going until all of your debts are paid. This method can help you save money but might not be the quickest way to pay off debt.
Whatever method you choose, freeing up your income will provide you with the tool necessary to succeed in pillar number four, planning for retirement.
Planning for retirement
Creating a budget and tracking your spending is critical to managing your money and staying on top of your financial situation. Paying off debt is essential to becoming financially literate as it helps reduce financial stress and free up your income to save for the future. Lastly, planning for retirement is a critical step in becoming financially literate. This involves understanding the different retirement plans available and creating one that fits your needs and goals.
When it comes to retirement plans, there are different options. Ensuring you understand all the possibilities is essential so you can choose the one that best fits your needs and goals.
Two of the most popular options are IRA and Roth IRA. An IRA stands for an individual retirement account and is a type of savings account that allows people to save money for retirement tax-free. The money in an IRA can be used to invest in stocks and mutual funds, among other instruments, which can grow over time. A Roth IRA is similar to an IRA, but the money in the account is taxed upfront and can be withdrawn tax-free when you retire. Contributions to an IRA are limited to $6,500 per year, with an additional catch-up contribution of $1,000 for those over 50. A Roth IRA is similar to an IRA, but contributions are taxed upfront and can be withdrawn tax-free in retirement.
A 401k is a retirement account that helps you save money for retirement. You can put money into the account, which will grow over time. Employers often offer 401ks, and some employers will even match your contributions. There are certain contribution limits that individuals must abide by. The Internal Revenue Service (IRS) sets annual contributions limits for 401k plans at $22,500 for the 2023 tax year for individuals under age 50. For those aged 50 and older, the limit is increased to $30,000 due to catch-up contributions.
One of the most critical aspects of planning for retirement is understanding how much money you will need to retire. This can vary depending on where you live, your lifestyle, and other factors. Estimating how much money you need for retirement can help you create a plan that ensures you have enough funds for retirement. It also allows you to adjust your budget accordingly to ensure you can save as much as possible.
Key takeaways for financial success
Financial literacy is an essential skill to have to be financially successful. The four pillars of financial literacy – creating a budget, tracking spending, managing debt, and planning for retirement – are key steps to attaining financial literacy. With the proper knowledge and tools, individuals can gain the confidence and discipline to make sound financial decisions. Financial literacy is more than just knowing how to manage money; it's about understanding the value of money and how to use it to achieve financial stability and success. Learning and practicing the four pillars of financial literacy can help individuals become financially literate and set themselves up for a secure financial future.
Joey Ruffalo, Executive Contributor Brainz Magazine
Joey Ruffalo, MBA-FP, is the owner of J.R. Financial Coaching. He is a 1 International Best Selling co-author of the book The Transformation Within and the 1 New Release An eBay Seller’s Guide to Financial Planning. Joey has paid off over $370,000. Joey has been a Top Rated Seller on eBay since 2000. Joey is a leading expert in financial planning for your eBay and e-commerce business. A regular guest expert featured on the eBay for Business podcast, Joey's insight into the reselling community is invaluable. Having run several successful small businesses, Joey knows what it takes to succeed. Combining his love of selling with his passion to help others, Joey offers a unique perspective on financial planning.
