What is Financial Literacy?

Financial literacy is defined as the education and understanding of various financial areas including topics related to managing personal finance, money and investing. But what does financial literacy mean to you?

In order to become financially fit you will need to master the art of personal finance, which at its foundation is being aware of what it takes to become financially literate. Some topics that will help you on your journey include the art of saving, investing for your future and budgeting for success.

The Art of Saving

The Art of Saving

Savings Goal

No matter who you are, or what your current financial situation is, having clearly defined goals will help you become financially fit. The first step in that process should be creating an emergency fund. There are a few stages of the emergency fund, but once you have established it start to map out some S.M.A.R.T goals that you want to save for. Setting goals will help you stay focused on the end prize and give you something to look forward to.

Set it and forget it

Once you start building your savings you will be tempted to dip into the funds but don’t to it! The number one way to kill your progress is by tapping into your savings for things other than emergencies. Automate your savings and cement your goals by setting up recurring deposits that go directly into your savings account. Once you get in the habit of paying yourself first, you will forget about spending and allow your money time to flourish and grow. Just remember, your financial freedom is more important than anything else.

Consistency is key

While your savings might seem insignificant at first, over time, with consistent contributions you will be surprised at how quickly your money will grow. The key to building your savings over time is to consistently deposit a set amount of your income. Think about a simple amount like $20 a week, or 5% of any income you receive. Even a dollar a day can make a difference in the long run!

If you want to supercharge your savings with monthly interest (aka free money), consider a high yield savings account like the one offered by Goldman Sachs that literally pays you to save.

Out of sight out of mind

Mastering financial literacy means actually taking the time to learn about the products that can help you accomplish your savings goals. Stop putting your money in a shoe box or under your mattress and take a few minutes to learn about savings accounts or CDs.

Methodically putting your money in these accounts will deter you from using the funds, and contribute to your long-term goal of building wealth. The harder it is to access your savings, the better.

Investing for your Future

Investing for your future

Ride the wave

Buy low and sell high, or consistently buy and let your money work for you. Many new investors may think that they need to perfectly time the market, but the strategy of dollar-cost averaging can help you accomplish this. Consistently investing will allow you to buy in at low & high prices, but over the long haul, the average price you pay will be lower than the current stock price.

Dollar-Cost Averaging

  1. Buy ABC stock

    Buy 1 stock of ABC on June 1st at $50 per share

  2. Price of ABC increases

    The price of the stock increases over time to $100

  3. Buy another ABC stock

    Buy 1 stock of ABC on July 1st at $100 per share

  4. Own two stocks of ABC

    You now own two stocks of ABC worth $100 per share

  5. Gain of $25 per share

    Although you paid $50 for the first share of ABC and $100 for the second share of ABC, you paid an average of $75 for both shares and have a gain of $25 for each share!

K.I.S.S

K.I.S.S. stands for “Keep It Simple Stupid. Investing can be as simple as you make it. You don’t have to work on wall street or at a hedge fund to make great investments. Investing in index funds or ETFs will give you access to all of the stocks and strategies that the professionals use. Depending on your risk tolerance and age, you may want to focus on the basics. A simple 60/40 balance of stocks and bonds can help build your nest egg and limit your downside risk.

Diversification

When investing, it is imperative to make sure to NEVER put all of your eggs in one basket. One way to ensure you do this is by diversifying your savings and investment holdings. It’s generally a good idea to invest in both stocks and bonds in order to have a balanced portfolio.

Budgeting for Success

Building a Budget

Rounding out your knowledge of financial literacy includes being able to manage your personal financial situation. Budgeting involves four key factors:

  • Tracking your income and expenses
  • Consistently preparing a simple and sensible monthly budget that works for you
  • Balancing your budget each month to ensure you are not spending more than you make
  • Sticking to your plan and being able to adapt to emergencies that happen throughout the month

Surprisingly, for many, a simple budget may seem like something that is not as important as saving or investing. But on the contrary, without a budget, you will be setting yourself up for failure. Therefore, budgeting will give you the clearest picture of your financial situation at all times and allow you to become financially literate.

Summary

In summary, becoming financially fit will not be easy. It will take some effort and hard work to learn about financial literacy and build your net worth. Most importantly, financial literacy is a marathon that never ends. You and only you can become the master of your fate, so start your road to success today.