Since this is National Financial Literacy Month, I thought I would start with a definition. “Financial Literacy is the ability to make informed judgments and effective decisions regarding the use and management of money”. Why is it important and when should you learn it?
Financial Literacy is a basic skill that is needed to function in society. Every person needs these skills to deal with financial problems, manage money and to make sound economic decisions. Learning to deal with financial issues at a young age will help manage money as an adult. Many young people do not know how to manage credit or how to stay out of debt. Why is this important?
What do you want to do that may cost a lot of money? Do you want to go to college, buy a car, buy a house or save for retirement? These are financial goals that require planning, saving and investing. Planning requires controlling your daily expenses and following a budget. Now you can look at your long-term financial goals and develop a plan to achieve your goals.
Budgeting is a plan to help you reach your financial goals. Budgeting allows you to know how much money you earn and spend. It allows you to organize your expenses so you know exactly where you are spending your money. A budget helps you control your expenses since you decide what happens to your money. This document gives you visibility into your spending habits and forces you to set priorities. In this way you set financial goals and you can track your progress toward your goals.
Many goals such as buying a home, saving for retirement or your children’s education take years to achieve. Long-term goals or multi-year budgets are necessary. In business, they call this strategic planning. You establish a goal that may take five (5) years to achieve, such as saving for a down payment to buy a house. That is your long-term goal! Then you develop a budget to reach that goal. You are breaking down the five (5) year goal into five (5) one year budgets to reach your goal in five (5) years. Each annual budget leads into the next until you achieve the down payment in five (5) years. Is it really that easy?
Making smart financial decisions require knowledge and skills. You have to educate yourself about budgets, making better financial decisions, controlling your expenses, developing a plan to reach your goals, and monitoring your progress. Is that easy? No, it requires discipline, determination and sacrifice, but the reward is achieving your goals. Evaluate and monitor your progress weekly, monthly, or quarterly and adjust your efforts to reach your goals.
This is just the beginning of financial literacy! Budgets help you control your expenses and planning will help you reach your goals. Personal financial literacy is more than reaching your goals and budgeting. Making smart financial decisions require reading a lot of material and finding the information that you can use in your personal financial decisions. This site is but one place to learn about financial literacy, so read a lot of perspectives so you will find what works for you. What are you going to do?
Photo by: theritters