The 6 Pillars of Financial Literacy
Financial literacy is a vital skill that can help you make informed decisions with your money. To celebrate the 20th Anniversary of Financial Literacy Month, we are exploring the six pillars of financial literacy to help you brush up on the skills you need to achieve economic success.
Learn the 6 Pillars of Financial Literacy
Financial literacy is the ability to understand and effectively manage your personal finances. It requires a comprehensive understanding of concepts like budgeting, saving, investing, managing credit, and financial products like credit cards, loans, and retirement funds.
Whether you’re a beginner or a money savvy-pro, paying attention to all six pillars of financial literacy will help you improve your relationship with money.
Pillar 1: Earn
Earning is a crucial pillar of financial literacy because it lays the foundation for your overall financial plan. Building and maintaining a steady income stream is necessary to meet your daily needs, pay bills, and make investments for the future.
You can earn income through:
- Hourly work
- A salaried position
- Independent contracting
- Investment returns,and more
Build a Successful Income Stream
Anyone can earn money, but achieving financial literacy requires you to figure out how to use your knowledge, skills, and talents to find opportunities that will maximize your earning potential. This knowledge will enable you to evaluate job offers and build a successful career by growing your role or seeking out new opportunities that take full advantage of what you have to offer.
Supplement or Increase Your Income
Starting a side hustle or other passive income stream is a great way to boost your earnings, especially if you are working toward a specific goal like saving for a big purchase or paying off debt. But if you’re constantly picking up extra work just to make ends meet, it could be time to look for a new job that supports your financial needs.
Pillar 2: Save
No financial plan is complete without a money-saving strategy. A solid savings plan will help you prepare for the future and work toward financial goals while balancing your everyday spending.
By saving money, you could:
- Build an emergency fund to cover unexpected expenses such as job loss or medical bills
- Make big purchases without having to rely on credit
- Handle sudden home or car repairs with ease
- Afford enjoyable experiences like hobbies or vacations
- Cover medical expenses not covered by your insurance
- Prepare for a comfortable retirement
- Leave a financial legacy for your loved ones
Save for the Future
People who save for the future have the financial security to deal with unexpected expenses without taking on debt. Putting money aside for important purchases and meaningful experiences can also improve your quality of life and help you retire comfortably.
Without savings, you may have to rely on credit cards or loans to cover expenses, leading to debt and financial stress.
Find New Ways To Save
Automating your savings can help keep your plan on track no matter what else is going on in your life. However, if you want to boost your savings in new ways, financial challenges are a good way to try new techniques, make saving more fun, and could help you break back spending habits.
Pillar 3: Spend
Budgeting is fundamental to financial literacy because it’s the best way to understand where your money is going and what changes you need to make to achieve your financial goals.
Taking a few simple steps to track your expenses every month can help you identify areas where you need to tighten the purse strings – or show that you’re due for a well-deserved splurge!
It All Starts With a Budget
Regular budgeting and reviewing purchases will help you notice trends and see ways to make the most of your money. Budgeting also encourages disciplined saving because it gives you the tools you need to prioritize. Once budgeting is a part of your routine, you’ll be less likely to make impulsive purchases, overextend yourself or take on unnecessary debts.
Find the Budgeting Method That Is Best for You
The most important thing to remember when selecting a budgeting method is that there is no one-size-fits-all solution – what works for someone else may not work for you. The key to finding the right system is understanding your spending habits and lifestyle.
Be honest about your strengths and weaknesses, and pick the budget you are most likely to stick to!
Pillar 4: Borrow
Being informed about borrowing includes understanding the various types of credit available, the conditions under which you can and should borrow, and the risks and costs involved in taking on debt.
Understanding Credit and Good and Bad Debt
Debt is often viewed as a negative aspect of personal finance, but not all debt is created equal. Good debt can be an effective tool for building wealth, while bad debt can be a significant barrier to financial success. Knowing the difference can help you make informed choices that will set you up for long-term financial success.
Maintaining a Healthy Credit Score
Your credit score affects your ability to borrow money and the interest rates you will be charged. By protecting your credit score, you can avoid high-interest debt and access better borrowing options when you need them.
Pillar 5: Protect
Safeguarding your sensitive financial information and understanding the risks and consequences of borrowing money and taking on debt will help you protect your financial health.
Protect Yourself From Overwhelming Debt
By becoming financially literate about debt, you can make smarter choices that prevent you from overextending yourself financially. If you already have debt and have become overwhelmed by it, you can learn about ways to get through it and restore your financial health.
Protect Your Financial Information
Protecting your financial information can prevent identity theft and unauthorized access to your accounts. Prevention is vital because these financial crimes can do severe and lasting damage to your economic well-being.
Pillar 6: Invest
Investing money is a crucial pillar of financial literacy because it is the most powerful way to grow wealth and reach long-term financial security. Investing is all about putting your money to work for you in ways that make it grow over time.
Make Your Money Work for You
Passive income is any income earned without requiring significant effort or ongoing involvement. It is sometimes called residual or investment income because it generates earnings after the initial work is completed.
This type of income can be generated from various sources, such as interest from savings or investment accounts, rental property, dividend-paying stocks, or royalties from creative work or patents.
How Financially Savvy Are You?
According to a poll by S&P Global Ratings, around 57% of Americans consider themselves financially literate. However, The United States only ranks 14th globally for our population’s financial literacy.
Chances are, even if you feel pretty confident in your financial literacy, you could take your skills to the next level by seeking out new information and resources on personal finance, like those in this blog.
Improve Your Financial Literacy
There is always more to learn, and staying curious about your financial literacy can help you make better decisions and set higher goals. You can attend workshops, take online classes or read books and blogs about personal finance, budgets, and investing. Also, talking with a financial planner or accountant is a great way to feel confident about major financial decisions.
Money Advice at Any Age
The financial needs of people at different ages vary greatly due to various life changes and goals.
For example, teenagers entering the workforce must learn how to budget and build credit for the first time. Those in their twenties may be looking to save for a home or start investing in the stock market. In contrast, individuals in their forties and fifties are more likely to be focused on saving for retirement and determining how much they need to maintain their lifestyle.
Different age groups often require different levels of risk tolerance when it comes to investments as well – e.g., younger adults may have more freedom to invest aggressively, while retirees need a safer approach that guarantees returns.