The old saying ‘money makes the world go round’ isn’t wrong: you need to know how to budget your bucks to be secure. That’s why financial literacy for beginners is so important. You don’t need to be Jeff Bezos or a maths whizz to take control of your cash. Here’s the financial literacy 101….
What is financial literacy?
A financial literacy definition is – in a nutshell – knowing how to budget, save, invest and take control of your money so that you can be secure throughout your life.
A lot of financial literacy information uses a whole load of big words and jargon that can be confusing. With financial education for beginners, it’s much better to put it simply.
So that’s what we’ll do here.
What are the three principles of financial literacy?
Think of these principles like golden rules. Follow them, and you’ll find things a lot easier.
Number 1: Never spend more than you earn.
Otherwise, you’re either going to struggle or be in debt. And you don’t want that.
Number 2: Always plan for the future.
Be prepared for the unexpected. Think about the years ahead. You want something in the pot to fall back on for a rainy day or retirement.
Number 3: Help your money grow.
Make your money work for you, not the other way round. This can be through solid savings choices (think interest), or investments.
What are the five components of financial literacy?
‘How do I teach myself financial literacy?’ you ask. Start with the basics. When it comes to financial literacy examples, there are five key components:
Earning
Spending
Borrowing
Protecting
Okay. What do they mean?
Earning
Bringing home the bacon. This could be income through a job, self-employment, investments, side hustles – whatever puts money into your bank account.
Don’t forget you pay tax on your earnings, so that’s taken off your total salary or wage.
Your total salary is called your gross – not because it’s disgusting, because it’s fat.
Like something you live off.
After taxes are taken, you’re left with what’s called your net earnings.
Sort of like what’s left in the net after the big fish have wriggled out.
So you need the other four components to protect the rest of the net for you to live off, if that makes sense.
Saving and Investing
This is crucial. If you don’t already, open a savings account alongside your checking account.
This will help build interest on your money – remember principle number 3? Savings can be for an emergency fund, retirement or even specific outgoings.
This last one is called a sinking fund, which you can find out more about here.
Whatever you’re saving for, set yourself a small goal to start off with.
Just $5 or $10 a week will soon add up.
Then gradually increase it to an amount that’s achievable for you every month.
Look for accounts with a high interest rate so you’ll get a better return on your money.
Spending
This is where your budgeting comes into play the most. If you overspend (principle number 1), you’re going to find things tough each month.
So you need to know the difference between a NEED and a WANT.
A need is something you absolutely have to spend on.
Literally. Like rent, utilities, food, transport.
A want is something you absolutely must have – but only figuratively.
Those shiny shoes calling out to you from the shop window, new sporting equipment, the latest phone.
They don’t help you survive. You just think you can’t live without them.
Newsflash: you can.
Factor all of your living costs and savings into a budget planner.
You can get some good templates here if you don’t know where to start.
Then you can see how much you have left to play with for the month.
If you’ve enough, feel free to buy the wants you’re after.
But only after you’ve covered all your needs.
Borrowing
Borrowing sounds like a bad idea, because borrowing generally equals debt.
However, there are some forms of borrowing that actually make financial sense, because it will help you build your credit rating up.
Say we’re talking about financial literacy for college students here.
Maybe you’ve got a student loan.
Do you see that as a debt hanging over your head? Don’t. See it as an asset.
If you make regular, consistent payments back on it, it shows on your credit report that you’re reliable.
This will help your credit rating, and secure you other things like a mortgage or a business loan.
Again, both of these things are assets. They help you accumulate wealth.
Another good form of borrowing is a credit card with a low interest rate.
Keep the limit low, spend on it regularly, but pay it off in full every month.
Sounds hard, but just use part of your wage to wipe the slate clean, then use it for your groceries.
It’s exactly the same as paying with your debit card, but this way, you’re building your credit score up.
Then banks will be more likely to lend to you at a better rate for a mortgage, so you won’t overpay on real estate. Win, win.
Protecting
This can come in many forms. One of the hottest financial literacy topics is credit-debt cycle traps.
You may be inundated with offers saying you’ve been pre-approved for a loan or new credit card.
Don’t touch them. You don’t need them.
Do your research if you want a credit card.
Make sure it’s one with a low interest rate (often known as an APR – annual percentage rate).
Otherwise borrow a hundred bucks and you could be paying back $150.
Another aspect of protection to consider in your new financial literacy curriculum is online security.
Make sure your money is in the vault not just IRL but in the ether too.
It’s not rocket science – use different passwords and different usernames for different sites to prevent hacking.
If your password is your favorite pet name, it’s time to change.
Don’t share personal information in public.
Social media posts often bait you into super fun quizzes asking you about where you grew up, names of family, pets, colours, whatever – avoid! They’re often harvesting for hackers.
Ensure you’re insured.
If you have a loss or damage, yes, your premium will go up and you’ll have to pay your excess, but it sure beats shelling out clams you don’t have in the bank.
Health insurance is a biggie, swiftly followed by home or renters’ insurance, car, pet and even (or especially!) business.
Finally, never share your PIN.
What are the best financial books for beginners?
There are loads of financial literacy books out there, so it can be confusing to know where to begin.
If you want to save money (and the environment), check out our blogs which are full of top tips.
But if you do fancy thumbing some pages, some of the best financial education books for novices are
- Broke Millennial: Stop Scraping By and Get Your Financial Life Together by Erin Lowry
- The One Page Financial Plan by Carl Richards
- I Will Teach You to be Rich by Ramit Sethi
- Your Money or Your Life by Vicki Robin
So, can you learn to be rich? 100%. Follow the main principles and components, and look out for little hacks for investing or saving.
You could even earn more through side hustles so that the pennies turn into pounds. Well, dollars.
Financial literacy for beginners? There’s nothing to be scared of when you strip it back to basics.
