Financial literacy is the possession of skills that allows people to make smart decisions with their money. Part of being financially literate is not only understanding the facts about money but also taking the right steps that can lead to the right financial outcomes. If you haven’t achieved full financial literacy yet, don’t worry. Tackle each of these steps with a clear action plan and, over time, you’ll increase your money savvy.
- Your money is in a lot of different places.
Diversification is a basic investment portfolio concept. The idea is that, if you put your money into many different areas (such as stocks, real estate or retirement accounts) then a failure in one of those areas will not be the end of the world and you’ll maintain overall stability. Diversification also can translate to greater cash flow flexibility, because not all the money will be tied up in long-term options.
- You have multiple streams of income.
Like general investment diversification, having multiple streams of income means that you’re not totally out if one stream dries up. That translates to greater financial stability, including your ability to keep investing. Multiple income streams also can mean that you pay off any debts you’ve acquired at a faster pace.
- You get the link between inflation and income.
Over time, the costs on most products will go up. This is inflation. But at the same time, income usually goes up gradually, too. If the income raises occur in tandem with inflation, then you’ll have the same purchase power as you did in the past. But there might be times when inflation outpaces income or vice versa, meaning that purchase power can shift and require you to reevaluate your spending. People who lack financial literacy struggle to understand this dynamic connection and believe that any increase in income should improve their ability to buy.
- You can do the math on compound interest.
Compound interest means that an institution pays you interest on your interest. For example, if you put $100 in the bank, let’s say the bank promised you an annual interest rate of 10 percent. At the end of the year, you’d have $110. If you left the money in the bank another year without spending anything, the bank would pay you interest not on your original $100, but on your $110 balance. So, at the end of the second year, you’d get another $11 for a total of $121. Even though the percentage the bank pays you annually is static, compounding means that, year over year, you always get more.
- You know what others say about you.
As a financially literate person, what’s on your account statements is no mystery to you, because you check those statements regularly. You also are aware of what your credit scores are. This awareness makes it much harder for others to defraud you, all while clarifying which lenders might be most receptive and what financial goals you might want to consider for the future.
- You do more than the minimum.
If you have any kind of debt, paying more than the minimum per month will help you save enormously in the long term, as it reduces the interest you must pay. It also clears the account balance faster, which means you have more financial freedom for other investments sooner. Additionally, if you put more money into accounts that pay compound interest or offer a matching contribution early, you’ll accumulate more funds.
- You pay nothing or very little in fees.
There are fees that companies charge that may be optional. Financially literate people are aware of their habits and do not pay for services they are not using. They sometimes ask for discounts, and get them, for being a good customer. They actively look for ways to bring costs down without sacrificing service, and they also always pay on time to avoid any penalties.
- You have a budget (and use it).
Budgeting requires you to not only grasp what money you have coming in, but also to keep track of everything going out. Without doing this, it’s much harder to determine what financial changes or goals to make.
- You take steps against identity theft.
With so much business and other activity taking place digitally, people are more vulnerable to identity theft nowadays. Financially literate people take basic precautions to protect their personal information. They do things like avoiding unsecure networks, checking card readers for skimmers and looking for ‘https’ at the beginning of website URLs.