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Financial Literacy 101: The Basics You Need to Know

Having a foundation of financial literacy and actively practicing financial tools can make all the difference.

“Adulting” is hard. Out of nowhere students are expected to understand terms like “finance,” “certificate of deposit” and “debit-to-income ratio.” What does it all mean? Though the importance of financial literacy might not have been a priority during our high school years, there are a few things more important as we prepare ourselves for the next step in our adult lives.

Whether you just opened your first checking account, or you have been “adulting” for years, having a foundation of financial literacy and actively practicing financial tools like budgeting, saving and investing can make all the difference as we look to reach major milestones in our lives. 

Let’s discuss some of the basics. What is financial literacy? Financial literacy is your ability to understand and effectively use various money-management strategies. Before you begin your journey of financial knowledge, just remember there isn’t one right way to be financially literate; it all depends on your circumstances and financial goals as you move through life. However, there are some basics that everyone could benefit from as they get started. 

Budgeting: A budget is simply a plan for your expenses. It helps create a money-saving strategy so you can better reach your goals. Your income, housing costs and hobbies are just a few factors that shape your budgeting game plan.

For example, if your monthly income is $2,800, your budget might look something like this:

Monthly Income: $2,800

· Rent or mortgage: $1,200 

· Utilities: $250 

· Groceries: $280 

· Phone: $70 

· Car payment, insurance and gas: $300 

· Savings: $400

· Miscellaneous: $300 

Of course, many factors could make your budget look different than this example, such as your income, hobbies, healthcare needs or the number of people in your household. Here are some budgeting tips to help you personalize yours.

Separate needs from wants: Understanding the difference can be tricky at times, as happiness and mental health are important factors and should also be considered. However, there are things you’ll inevitably need to include in your budget, like rent, groceries and transportation – basically, the stuff you can’t live without. Wants, on the other hand, are the extra items or services that should only be considered when your budget allows for them, like spa treatments, home décor or trendy shoes. Prioritize your needs first and make sure you've got them covered before splurging on the fun stuff.

Stay organized: Now that we have our expense list sorted, let us keep it organized to stay on track with upcoming bills and costs. There are plenty of tools out there, like budgeting apps, planner notes or custom spreadsheets. Staying organized helps you better see how far your money will go or if any changes need to be made. 

Put your savings first: An easy way to think of this habit is: Pay yourself first. Set aside savings as soon as you get paid to ensure you are not spending them on unnecessary purchases. To create a clear line between your spending and savings, consider using separate accounts for each. This helps maintain a distinct boundary between the money you use for everyday expenses and the funds you are setting aside for the future. Another trick is to adjust your direct deposit settings so that each paycheck is split up between your checking and savings. A percentage (or a flat amount) of your choice will automatically hit your savings with every paycheck!

Future Planning: Set yourself up for a more financially abundant future by thinking of retirement now. Your retirement contributions should be factored into your budget as soon as you can afford them. Look into your retirement options as you dive into new careers to select the one that fits your goals the best! 

As you begin a new career, ask your employer if they offer a retirement plan with a company match – for example, if a company matches up to 4% of your salary, you will receive that money if you contribute at least 4% as well. If your employer does not offer a match, you may want to speak to a financial advisor about getting started with your own retirement plan.

Adjust as needed: As life changes, so does your budget. Try to prioritize being realistic over being consistent each time you set a new budget. Stick to your planned spending but adjust accordingly. 

Treat Yourself: Reward yourself for reaching your financial goals! Big or small, recognize your victories. Set some realistic goals – like reaching a certain balance in your savings account or staying faithful to your budget for six months straight – and treat yourself to items on your “want” list! 

Saving

Another component of creating good financial habits is setting a savings goal. Your savings can help create a safety net for any unexpected costs that may pop up. There are two ways you can set up your savings account. You can create a separate account within your current financial institution or create a separate account just for your savings. This creates an “out of sight, out of mind” account to help you not dip into the savings as the amount grows. 

While your checking account houses your spending money and is typically linked to a debit card, a savings account is designed to hold onto your money long-term and grow over time with interest. Most financial institutions offer three types of savings accounts:

1. Regular savings account: These typically have low interest rates – meaning you’ll only make a small amount of extra money on them over time – but easy access to your funds. It’s a great way to start saving, especially if you can only contribute a small amount upfront and it’s likely you’ll need to pull money out for emergency purposes. Be sure to ask about the limits on transactions before you open the account; if you plan to withdraw money regularly, you might be better off opening a checking account.

2. Money market account: These tend to have slightly higher interest rates than regular savings accounts (usually the more money in your account, the higher the rate) and they may have a minimum balance requirement to avoid fees. A money market account typically comes with a debit card and checkbook and access to your money would be like a regular savings account. 

3. Savings certificate or certificate of deposit (CD): If you want a high-interest rate and you’re confident you won’t need to access your savings for an extended period, a CD – also referred to as a savings certificate by credit unions – is your best bet. With this kind of savings account, you’ll agree to a specific term (which could be six months to several years) where you won’t withdraw any money. If you do withdraw before the term ends, you’ll likely pay a fee. Some CDs or savings certificates will require a minimum balance and they typically don’t charge monthly fees. If you have at least $1,000 to deposit and you’re looking for a term anywhere from six months to five years with no monthly or annual service fees, a Desert Financial Savings Certificate could be right for you.

Managing Debt: 

Now that we have looked at money coming in, let's look at money spent. Auditing your debt will help you better understand your different lines of credit. There are types of debt that are considered “good debt,” like student loans and mortgages, because they help build your credit and add something of value to your life. Then there’s “bad debt,” which does not help your financial future, like excessive credit card debt.

Here are a few tips to managing your debt:

1. Know your debt-to-income ratio: This is all your monthly debt payments divided by your gross monthly income. Let’s say you pay $1,800 a month between your car and house payment, and your gross monthly income (before taxes and other deductions) is $6,000. Your debt-to-income ratio would be 30%. Many financial experts agree that an average of 35% or less is considered manageable, so if you’re already at or above that, it’s probably not a good idea to bring more debt into your life. 

2. Pay on time. Late loan payments negatively impact your credit score – in fact, your payment history carries the most weight out of all the factors that determine your score. Make sure you pay on time!

3. Pay extra, if possible. With any loan, you’ll owe a minimum payment each month – let’s call it $200 for your car payment. While there’s nothing wrong with making the minimum payment, you’ll pay off your loan faster and save more money in the end if you can add a little extra here and there. If you can bump that $200 to $250 or $300 each month, you’ll be on track to get out of debt faster. 

4. Search for a lower interest rate. If your current interest rate on your loan is higher than average and you qualify for a lower rate, consider refinancing. Depending on your new rate, you could save a chunk of money each month.

Investing:

Being a successful investor comes with time and education, so you don’t need to understand all the investment types to know the basics of financial literacy. Once you’re confident in your ability to budget, save and manage debt, consider talking with a financial advisor to customize your investment plan based on your financial goals. 

Financial literacy might seem daunting, but there are countless resources out there to help you get where you want to go. Visit our Learning Center for everyday tips and tricks – and don’t forget to take your journey one day at a time.

Start small today.

Disclosures: 

The material presented here is for educational purposes only and is not intended to be used as financial, investment or legal advice.

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