Despite money being one of the most important aspects of life, most of us are never taught the basics of personal finance or financial planning in school. However, financial literacy is fundamental to building a secure life. It’s the knowledge and understanding of various financial concepts and principles that enable individuals to make informed and responsible decisions regarding their money. Unfortunately, many people lack the necessary financial knowledge to manage their finances effectively, leading to debt, poor investments, and financial instability. Below, we will explore the key concepts every adult should know to improve their financial literacy and secure their financial future.

Financial Literacy Concept #1: Budgeting

Budgeting is the cornerstone of successful financial management. A budget is essentially a roadmap for your money, helping you track your income, expenses, and savings, and ensuring you’re on the right path towards any financial goals you’ve set for yourself. Creating a budget allows you to allocate funds where they need to go while also helping you identify areas where you can cut back, save, or invest. Without a budget, it’s easy to overspend and lose control of your finances or live outside of the lifestyle you can afford – especially when social media is constantly sending us messages that we need to “keep up with the Joneses.”

Financial Literacy Concept #2: Saving

When it comes to building wealth over time, intentional saving is crucial. There are a few aspects to saving that you’ll want to focus on for long-term financial security. First, it’s important to set aside an emergency fund, or a savings account specifically meant for unexpected expenses like medical emergencies, car repairs, or an unexpected job loss. Having an emergency fund helps you avoid going into debt or digging into your long-term savings should an unexpected financial challenge arise. It’s typically recommended that you save at least three to six months’ worth of living expenses in your emergency fund.

Along with an emergency fund, you’ll also want to have your primary savings account where you contribute money each month to help set yourself up in the future. This is where you can put money that you’re saving for any short- or long-term financial goals you have, whether it’s a vacation you want to go on next year or the house you want to buy in five years. A good strategy to ensure you contribute money consistently is to set up an automatic transfer directly into your savings account every time you get paid. This can help eliminate any temptation to spend the money before it gets to your savings.

Financial Literacy Concept #3: Credit and Debt Management

Understanding how credit and debt work is essential for maintaining financial wellness. Maintaining good credit is crucial because it can help you qualify for better loan terms and lower interest rates, help you rent or buy a home, help you get a car, and much more. On the other hand, managing your debt wisely is imperative if you don’t want to be weighed down by it for years. This doesn’t mean never taking on debt – indeed, sometimes dent is an investment, such as in the case of student loans – but you should work to pay down high-interest debts, such as credit card balances, as soon as possible. The goal should be to avoid getting buried in high-interest debt that can spiral out of control and take years to pay off.

Financial Literacy Concept #4: Investing and Risk Management

If your savings is the foundation of building wealth, think of investing as a supercharger that you can add to your wealth building strategy. While investing can be a helpful tool, it also inherently involves risk and can be complicated to understand. Be sure to take time to learn about all of the different investment options such as stocks, bonds, mutual funds, and real estate. Each option comes with its own set of pros and cons and its own amount of risk. Diversifying is a great strategy for managing risk, as spreading your money across various asset classes can reduce the impact of a single investment’s poor performance.

Financial Literacy Concept #5: Retirement Planning

Planning for retirement is another essential part of financial literacy. At some point, your paychecks are going to stop, whether by choice or necessity, and you’re going to have to depend on your savings and investments to support your lifestyle. Because of this, saving for retirement should start as early as possible. Many employers offer retirement savings plans like 401(k)s, which often come with employer matches. Do whatever you can to earn the full match, and max-out your annual contributions whenever possible.

Financial Literacy Concept #6: Taxes

This is a topic that many people like to avoid, but taxes are a significant part of every adult’s financial life. Understanding the basics of income tax, deductions, and credits can go a long way in helping you minimize your tax liability. Moreover, knowing how to file your taxes accurately and on time is essential to avoid penalties and interest charges. For many individuals, it might be beneficial to consult a tax professional or use tax software to ensure accurate and efficient tax preparation. When it comes to your retirement savings, different accounts are taxed in different ways, and understanding the differences can help you level up your financial literacy.

Financial Literacy Concept #7: Compound Interest

Compound interest is a powerful financial concept that you can use to your benefit. When you save or invest money, you earn interest not only on your initial principal but also on the interest that accrues over time. This compounding effect can help your money grow significantly if invested wisely, so begin as early as possible.

Financial Literacy Concept #8: Inflation

Inflation is the gradual increase in the prices of goods and services over time. What makes it so dangerous is that it erodes the purchasing power of your money, meaning that the same amount of money will buy less in the future. The reason it’s so important to plan for inflation is because if you don’t, you run the risk of being unable to maintain your current standard of living once you retire. A savvy way to counter the effects of inflation is to invest your savings into assets that have the potential to outpace inflation. A financial advisor can offer guidance in this area.

Financial Literacy Concept # 9: Estate Planning

Thinking about mortality is always uncomfortable, but if you want to have a say in what happens to your assets when you pass away, then estate planning becomes crucial. Estate planning involves creating a plan for the distribution of your assets, and includes creating a will, designating beneficiaries, and considering the potential tax implications of transferring your assets to heirs. It’s important to remember that this is not a set-it-and-forget-it process, but rather something you should review regularly to ensure it remains up-to-date and aligned with your wishes as your life evolves.

Financial Literacy Concept #10: Insurance

Insurance plays a vital role in financial security because it offers you protection from things you can’t foresee. There are different types of insurance, such as health, life, auto, and homeowners’ insurance, and each of them offer you financial protection from unexpected events – sort of like your emergency fund. Understanding the coverage provided by your policies and ensuring that your insurance adequately covers your needs is paramount. You’ll also want to be aware of any premiums, deductibles, and policy terms associated with your insurance plans.

Take Control of Your Finances Through Enhanced Financial Literacy

Financial literacy is knowledge that empowers you to navigate the complex world of money. The ten key concepts listed above form the foundation of financial knowledge that every adult should strive to understand – and these are great concepts to begin teaching your children and grandchildren, too. Whether you’re just starting on your financial journey or looking to improve your financial literacy, mastering these concepts can help you make more informed and responsible financial decisions, helping you take control of your finances, build wealth, and secure a more prosperous financial future.

If you’re looking to secure your financial future, take the first step towards greater financial literacy and security today! Our team of advisors at Cash Financial is committed to empowering our clients through financial education and expert wealth management guidance. Contact us for personalized financial guidance, strategies, and solutions to empower your financial journey. We look forward to hearing from you!