Learn 8 Tips for Financial Literacy

This article is a guide for anybody who needs to go for financial literacy in the year of 2011.


Did you know that the month of April is Financial Literacy Month? What is financial literacy? Are you financially literate? A short definition is the ability to understand finance. In the real world, it consists of having the knowledge and skills required to make good decisions where your finances are concerned.

I find it interesting that the United States government created the Office of Financial Education in 2002, the Financial Literacy and Education Commission in 2003, and that President Obama officially declared April Financial Literacy month, yet our government is expected to reach its debt ceiling of $14.29 trillion by May 16 - not even halfway through the year!

You'll find a lot of resources on government and private websites on getting your finances into shape. Here are 8 tips for financial literacy in 2011.

Tip #1 - Where Does Your Money Go?
It seems a simple thing. But you'd be amazed how many people don't know where their money goes every month. I can remember times in my life when I would deposit my paycheck and get cash back, and then Monday morning wonder where the cash had gone and it was two weeks before the next payday! The best thing you can do for yourself is to determine where your money goes. Start tracking your purchases. One of the easiest ways to do this is to get a receipt for every purchase. In the evening, or at least once a week, go through your receipts and see where your money went. After you've done this for a while, you'll be ready for tip number two.

Tip #2 - Take Charge of Your Money
The best way to do this is to develop a budget, or a spending allocation plan. If you don't tell your money where to go, you will run yourself ragged trying to make enough to make ends meet. First determine what your income is. Then determine what your fixed expenses are. These are the ones that really aren't optional, and they come like clockwork every month. You don't have a lot of control over these - at least in the short-term. Things like your rent or mortgage, and your car payment fall into this category. Finally, add in your variable expenses. You have to eat, but the amount you spend on food can vary widely. For now, just average what you've been spending. Now comes the moment of truth: does your income exceed your expenses? If so, congratulations! You are actually in the minority in America. Sad, isn't it?

Tip #3 - Pay Yourself First
I'm sure you've probably heard this before, but it can't be said too much or too often. If you don't pay yourself first, it's unlikely you will pay yourself at all. Those who are truly financially literate are saving money. When you are young, this is incredibly important even though it may not seem so important. After all, you have your whole life ahead of you, right? Don't underestimate the power of compound interest. There are many people in their later years who wish they had invested young and invested a lot. The things that you think are so important to buy today won't seem so important 40 years from now when you are approaching retirement with a too-small nest egg and the things you spent your money on when you had so much time to save vanished long ago.

Tip #4 - Save for a Rainy Day
You heard your grandma say it - at least mine did! The thing with rain is it falls on everyone alike. It doesn't matter how nice a person you are or how good your intentions are. The one thing I can guarantee you is that things will wear out, stuff will break, expensive items will have to be replaced and people will lose their jobs. The question is, are you prepared for those rainy days? The basic rule of thumb is that you want to save between three and six months of expenses. That way, if anything happens you should be covered. How much is enough? That depends on your expenses. But, lucky for you, you have already done Tip #2 so you know what your expenses are every month, right?

Tip #5 - Dump Your Debt
You just don't have much chance being financially fit if you are carrying around a heavy load of debt. With high interest rates, it could very well take you 30 years or more to pay off your credit care debt if you are only paying the minimum amount each month. That's the credit card company's plan. You'll end up paying for whatever you bought on credit three times once you add in the interest. Do yourself and your future finances a favor, and pay off your credit cards as soon as you possibly can. Have a yard sale. Do some extra jobs on the side. Tighten your belt and pack a lunch. Then, once you get the bills paid off, chop up those cards and vow never to get into credit card debt again!

Tip #6 - Where Are You Keeping Your Money?
Some people get the message that they need to save money. They put themselves on a budget and cut their expenses and save every penny they can. But, where are you saving your savings? If you are just keeping it in your checking account or in a regular savings account your savings aren't even keeping up with inflation. Your best bet is to invest that money so that it can start working for you, instead of you just working for money. In addition to your rainy day savings, you should be saving for retirement, and you should also be saving for larger purchases so that you don't resort to credit when you decide its time to replace your old furniture or your car.

Tip #7 - Know Your Investment Threshold
There are some standard rules of thumb when investing. In general, the younger you are, the more risk you should be able to handle in your investments. The older you are and the closer to retirement you are, the more you should start shifting your money into investments with less risk. Of course, you also have to take your personal temperament into account. If you are terrified of losing everything you have saved each time the stock market dips, then you may want to invest in lower risk accounts.

Tip #8 - Get Your Affairs in Order
You probably think this only applies if you are staring death in the face and your doctor has told you to go home and get everything in order. But, there is no time like the present to make sure your future and that of your family is insured against disaster. Review your insurance policies. Make sure you have enough coverage for your house and car. If you don't have life insurance, and your family depends on your income for survival, then you need to get some. If you are in good health and middle-aged or younger, you can get a policy that will cover your family and not drain your budget. Have a written will. More than half of Americans don't. It's devastating enough for your family to deal with your death, don't make them wonder what your final wishes were. In addition to your will, have a file drawer with a list of all important documents, insurance policies, investment and bank accounts, etc. so that your survivors can easily find this information.