Financial literacy may not be a topic taught in school or talked about often, but it really should be. The term simply refers to your understanding of financial terms and skills, like saving, using credit and budgeting.
While most people understand financial basics, the finer points of investing, managing credit and living on a budget often get less attention. The result often means living paycheck to paycheck with too much debt and too little savings. In fact, 125 million Americans live paycheck to paycheck, according to the Reality Check: The Paycheck-To-Paycheck Report conducted by LendingClub.
The good news is that there is always time to increase your financial literacy and take charge of your money. Here are a few strategies to help you get started on your path to financial literacy.
Create A Budget That Works For You
It’s easy to think of a budget as something people with expendable income do, but budgeting is really for everyone. In fact, a budget is a great way to make your money stretch further.
A few benefits of budgeting, regardless of your income, includes:
- Discover spending patterns and correct them if needed.
- Prioritize your income more effectively.
- Identify possible areas where you can cut back.
- Reduce credit use.
- Create better money habits.
Having a written budget will quickly give you a realistic picture of your financial situation. This might seem overwhelming and stressful at first, but the first real step to becoming financially independent is taking charge of your money. Luckily it’s not as hard as it might seem, especially with a little budgeting know-how.
Here are a few paths you can take to create a successful monthly budget.
Try the 50/30/20 Rule
Have you ever paused before you bought something and asked yourself if the item was a need or a want? If you have, you already basically understand the 50/30/20 rule. This personal budgeting method puts your income into three categories: needs, wants and savings. Here is how it works:
50% of your income should go toward things you need. This includes rent, utilities, food, insurance and transportation. It does not include expenses like entertainment, streaming services or trips. Create a written list of needs to prevent unnecessary expenses from sneaking in. Think of this category as the bare basics you need to live, nothing more and nothing less.
30% of your income should go toward wants. This list is far more flexible but includes the cost of hobbies, eating out and entertainment. This is discretionary income, so everything you don’t need to sustain your daily life, but you want anyways, goes here. If you find that 30% is more than you need for any given month, put the extra money towards savings.
20% of your income should go into savings. In this category, you should have a savings account where you set money aside for the future. You will also want to have an emergency fund to cover unplanned expenses like car trouble. Aim to have three to six months of living expenses in your emergency fund. It is important to have both types of savings, so you don’t end up relying on credit to handle life’s little surprises.
Zero-Based Budgeting Rule
Zero-based budgeting might sound complicated, but it simply means that you assign every dollar a purpose. At the end of the month, your income minus your expenses should equal zero. This does not mean you spend everything, but categorize your living expenses and purposely allocate your income to cover them. To do this successfully, you need to realize that savings are an “expense.”
Here are another few tips for using this method of budgeting:
- Track your spending closely and see where your money is currently going.
- Make a list of all your monthly expenses, using your current spending as a guide for your budget going forward.
- Categorize your expenses into needs, wants and savings.
- Prioritize your expenses with an emphasis on needs and savings.
- Allocate your income to each category by covering needs first. Everything that is left goes to the remaining categories until you’ve “zeroed out” your income.
Start Building Credit
You might not think about your credit score often, but it plays a big role in many aspects of your life. Your creditworthiness impacts your ability to buy a car, rent an apartment, get a loan or credit card. If your score is low, you’ll often pay more for lines of credit, which can add up over time. While determining your credit score is a bit complicated, it comes down to factors like your payment history and how much you owe and how much credit you have.
It is harder to repair bad credit than to build good credit, so you’ll want to guard your credit score closely. Here are a few tips to help you get and stay credit-worthy:
- Make all of your payments on time. Everything counts, including retail card payments to utilities and rent.
- Keep your credit utilization reasonable. This refers to how much of your credit you actually use. For example, if you have maxed out your credit cards, you’re utilizing all of your credit. This can negatively impact your credit score.
- Account age matters, so the longer you have a credit account open, the better. If you have a credit card or line of credit, keep it open and in good standing.
- Keep your account balances low on revolving credit accounts like credit cards and lines of credit.
- Applying for some types of credit accounts can temporarily hurt your credit. To avoid this, don’t apply for multiple lines of credit near the same time.
Saving And Investing
You may think that saving and investing is something that can wait until after college, but the earlier you start, the better off you’ll be. It doesn’t have to be complicated. Start by setting some easy savings goals. Even when your income is low, these three easy strategies will make your money work harder.
- Create a budget that includes some types of savings. It doesn’t have to be much to add up over time.
- Start an emergency fund to help cover incidentals, so you don’t get sidetracked when something goes wrong.
- Make reducing costs a priority. You can use public transportation, cook at home instead of eating out, have a roommate, ask for student discounts and take advantage of amenities at your college. For example, fully utilize your meal plan, gym and anything else included in your tuition and fees.
And while you may not have much to save or invest now, that doesn’t mean you can’t prepare yourself for the future. Make learning about finances, including investing, a priority, so you are ready when the time comes.
Debt Management
Few things can take away your financial independence as quickly as debt. Unfortunately, many college students don’t learn this until they have racked up a lot of it. In fact, in 2020, the average student graduated with just over $39,000 in student loan debt alone. This doesn’t include consumer debt like credit cards, car loans and other credit sources.
Don’t get stuck carrying around debt from college for years to come. Use these strategies to keep your debt in check.
- Keep credit use to a minimum.
- Pay more than minimum payments whenever possible.
- Work part-time instead to reduce using student loans for living expenses.
- Track spending and live on a budget
Learn More About Financial Literacy
There are some common themes in financial literacy like budgeting, saving and credit and debt management. Understanding these topics will help you create a solid financial base long after your college days are behind you. Additionally, you’ll want to continue to learn about finances and establish a relationship with a trusted financial institution now so that you have a reliable source for financial-related questions and needs in the future. Contact Arizona Central Credit Union today and our experts will help you with any financial questions you may have.
Want to start early? Check out our Financial Literacy Tips for Kids guide.
