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7 Steps to Financial Literacy

See also: Understanding Debt

The number one problem in today’s generation and economy is the lack of financial literacy.


Alan Greenspan, Former Chair of the Federal Reserve of the United States

Financial literacy is the knowledge of an individual of financial matters like budgeting, investing, banking, and personal financial management, etc. This is the knowledge that helps someone to take appropriate action regarding their financial affairs.

Being financially literate can change one’s ability to earn a livelihood, contribution to society and one’s attitude toward money.

Financial literacy helps a person to achieve a financially balanced, responsible and ethical lifestyle and make appropriate financial choices during their lifetime. Studies have shown that financial literacy greatly affects a person’s saving, investment, debt management and loan taking practices.

The Steps to Financial Literacy

Financial literacy is crucial to making appropriate financial choices throughout life. In this article, we examine seven steps to help you to improve your financial knowledge and literacy.

These steps are:

1. Learn How to Budget

The first step to gain financial literacy is learning how to budget.

When you have a budget plan, you can spend money accordingly and will be able to save any extra to use later in case of an emergency. Without a budget plan, you will be unable to control your spending and, as a result of this overspending, may suffer if your salary or allowance ends.

In order to make budget plan, you first need to note your monthly income and, second, track your spending. You need to include all your fixed expenses like your mortgage or rent, utility bills, loan payments etc. and then include variable expenses such as groceries, entertainment, etc. After tracking your major spending, make sure to set your financial goals, saving money for example. There are two types of financial goal: short-term goals (can be achieved within a year) and long-term goals (may take longer than a year, such as retirement savings etc.).

After setting all these up, finalize your plan and make sure to follow it in order to achieve financial balance.

2. Understand Your Credit Score

It is very important to understand your credit score. But why is your credit score important, how is it calculated, and how can you it?

When someone pays off their credit bills on time, they are viewed as trustworthy by the lender. They begin to build a credit history and are afforded an improved credit score that will help them obtain future loans. In the US, a credit score is a three-digit number from 300 to 850. A high score indicates someone who is a low risk financially and who repays their credit bills on time, while a low score indicates someone who is a credit risk and who has likely not previously paid their credit bills on time.

You should also be aware of your credit report, which is a summary of your financial situation. By reviewing your credit report, you will be able to spot any errors or fraudulent entries and can take legal steps to overcome the loss. This report may also help you to track your spending and improve your credit score over time.

3. Open a Savings Account

A savings account will help you to save any extra money you have, is the best way to keep your money safe and secure, and may even pay you interest, offer insurance and security.

A savings account also makes billing easier and more convenient for the user, while an ATM card is portable and better than keeping cash in a wallet.

4. Understand Loans

It is important to understand the importance of paying off your debt/loans.

Having a debt-free life is a desirable dream for most individuals. There are two ways to pay off your debt fast. One way is to identify the loan with the highest interest rate and pay this off first, hence reducing the amount of interest you will need to pay in the long term. Once this debt is cleared, you can then focus on paying off the loan with the second highest interest rate, and so on.

An alternative approach is to pay off all small debts first and then focus on the larger loans.



5. Expect Risk

It is crucial to be ready for unexpected risks with money put aside in case of emergency.

Many people don’t anticipate such risks and suffer as a result. Think about the Covid-19 crisis and how many people all around the world suffered financial loss because they were not prepared.

Experts say that you should have a reserve of three to six months living expenses for use in case of an emergency. When you are prepared for unexpected risks in this way, you will be able to keep a minor financial crisis from turning into a major one. For example, if you were to lose your job, you should have enough savings put aside to meet your monthly expenses until you can find a new job.

Unfortunately, some people become homeless after losing their job because they hadn’t anticipated this risk.

6. Secure Your Future

It is also important to be ready for your retirement. Many people may think they are too late already, but it is better late than never. Making an appropriate retirement plan is a crucial step in financial literacy.

The first thing to do when planning your retirement is to consider your age and when you would like to retire. You should then determine your retirement spending needs, like monthly bills, grocery bills and medical expenses. Then calculate the investment rate of return and decide if your retirement fund will be able to generate the required income after tax. After that save money and make appropriate investments for your retirement.

7. Reduce Spending

If you wish to put more money aside as savings, you have two choices. You can either take on another job to increase your income, or you reduce your outgoings or expenditure.

Spending can be reduced by planning your grocery shopping list carefully. For example, if you want to buy two items but also want to reduce your spending at the same time, you need to identify the most important item and buy that one first. The next month when your new salary comes in, you can buy the second item. Dividing your spending over a period of several months in this way can help you to save money. And reducing your spending will help you to reach your financial goals.


About the Author


Uzair Naeem graduated in English and works as a freelance writer. He enjoys reading, as well as writing short stories, essays and articles on various topics. He believes that writing is a powerful medium for expressing oneself and hopes this guide proves useful to readers.

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