Improve Your Financial Literacy

You may have heard the term "financial literacy" in the news lately. April of 2013 was designated as Financial Literacy month by the U.S. Congress in hopes of spotlighting the sad state of affairs that most American consumers find themselves in regarding their own financial situations.

The truth is a specific month allocated to talking about financial literacy is very short-sighted and simplistic. Improving everyone's financial literacy should be an ongoing process involving large doses of consumer education and robust conversation.

The Scary Financial Truth

The financial services industry which includes banks, savings and loans, credit unions, and credit card lenders, has a huge economic interest in keeping the American public illiterate when it comes to their finances. Unfortunately, the statistics bear out just how woefully ignorant many people are concerning their personal financial situations. Find that hard to believe? Check out the following facts:

• 39%. That's the percentage of U.S. adults who carry over credit card debt from month-to-month.
• 56%. The percentage of U.S. adults who have no budget in place.
• 33%. This percentage translates to approximately 77 million U.S. adults who are routinely late when paying their bills.
• 39%. The percentage of U.S. adults who have no type of savings (excluding retirement).
• 40%. The percentage of American adults who are saving less than just one year ago.

If you think it can't get any worse, here are a few more facts which should get your attention:

• 60%. The percentage of Americans who don't have an emergency fund that will cover at least three months of living expenses.
• 55%. The (frightening) percentage of U.S. adults who admit to spending all or more of their monthly household income each and every month.
• 24%. The percentage of adult Americans who have taken out high-cost, non-traditional loans in the past five years, such as tax-refund advances or payday loans.

The good news is it's never too late (or too early) to become financially literate. Yes, it may take some time and it certainly needs a firm commitment on your part. But the positive results of gaining control over your finances far outweigh simply burying your head in the sand and hoping for the best.

What You Can Do to Improve Your Financial Literacy

Many Americans have a very simple way of dealing with money. Each month they spend their income until it is all gone and limp into payday...when the whole cycle will begin again. This is a stressful and scary way to live. There is no reason to fear dealing with your financial situation head on. Ignorance is definitely not bliss.

Financial literacy really isn't a difficult, foreign concept to master. In simple terms, having a thorough understanding of your finances will allow you to keep more of your income, spend less, and save for the things that are important to you.

To develop your money management skills and become more financially literate, the following suggestions should help:

1. Get up close and personal with your household finances. You should know exactly how much income you have coming in each month, what your monthly expenses are, and specifically where your money goes. You can do this by:
   
   • Checking your pay stubs and reviewing your bank account statements. Write down your net income (after all deductions) and any other sources of income.
     
   • Going over your monthly bills. Make a list of every monthly bill you have. This will include fixed items such as rent (or mortgage), all utilities, insurance premiums, car payment(s), and telephone/internet services. Other bills may have fluctuating payments such as credit cards, store charges, gas (fuel) expenditures, food, and entertainment. Calculate how much you are spending each month on each and every item. (This may be a real eye-opener.)
     
   • Carefully examining your credit card statements. Let's face it. Most people probably never read all the fine print that comes with a credit card. But it's important to know the exact terms and conditions of your credit card agreement. What is the annual percentage rate? When do your purchases start incurring finance fees? (Is there a grace period or are you charged immediately upon purchase?) What is the over-limit fee? What is the late payment fee? These are all things you need to be aware of! Not knowing this information can cost you a lot of money in fees and finance charges. Always know your credit card balance and the payment due date.
     
   • Keeping track of any loans you may have. Know how much you owe and when the loan is due to be paid off. Again, be aware of your annual percentage rate and any fees or penalties you might be assessed for late and/or missed payments.
     
   • Checking your credit report at least once a year. You are entitled to one free credit report per year from each of the three main credit reporting bureaus- TransUnion, Equifax, and Experian. Carefully go over your credit report and make note of any errors or out-dated information. You have the right to dispute any erroneous information by contacting the credit bureau and offering supporting evidence to back your claim.


2. Develop a realistic budget. It's nearly impossible to successfully manage your finances without a sound, livable budget in place. Formulating a budget doesn't have to be a scary, complicated undertaking. These easy steps can help you get started:
   
   • List your income. Simply list all sources of monthly income and arrive at the total.
     
   • List your expenses. Keep track of everything you spend (even those coffees you buy each morning). Get a shoe box or other type of container and every night, put in all of your daily receipts. This is a simple and easy way to see what you are actually spending as opposed to what you think you are spending.
     
   • Make a list of all necessary expenditures. Many people have a hard time differentiating between a "want" and a "need". A need is the roof over your head, not dinner out with the gang every week. Tweak the "want" list and see what you can eliminate entirely or worst case, cut back on significantly. The beauty of a realistic budget is it shows you where you are seriously leaking money so that you can close the holes and begin saving.


3. Remember your budget isn't set in stone. Financial situations change. Bills get paid off. Your income may rise or fall. Keep your budget flexible and go over it often. Always look for ways to save. Use the extra cash to pay off outstanding debt more quickly or put towards savings.


4. Set financial goals. Studies show that people tend to stay on track when they are working towards a specific goal or goals. Do whatever you personally need to do to stay focused on your ultimate goal. Whether it's being debt free, taking a dream vacation, or saving for a down-payment on a house, have positive reminders of what you are working towards.


5. Know the difference between good debt and bad debt. You may think that all debt is bad debt but that's actually not the case. Debt which helps you build wealth, such as a mortgage, is considered good debt. Credit card debt is a perfect example of bad debt. Millions of people are paying interest on purchases they made years ago and which now have little or no value. The only way a credit card can be considered good debt is if you pay off the entire balance each month, thereby eliminating all finance and interest charges.


6. Avoid the "Big Three" Money-Mistakes.
   
   • Not setting financial goals. Why make it harder to succeed than it has to be?
   • Using credit to live beyond your means. If you can't pay cash for something, you probably can't afford it anyway.
   • Thinking of luxury items as necessities. A place to live, food to eat, and clothes to wear- these are true necessities.

On a final note, take advantage of local organizations which many times provide valuable information related to personal finances. Check out your local library for publications and other sources on ways to improve your money-management skills. If you live near a college or university ask about free seminars or if classes related to money and finances are available to audit.

With a little time and effort, you too can become financially literate. It's one of the smartest investments you'll ever make!