The Five Pillars of Financial Literacy

Five Pillars of Financial Literacy Month

While we recognize financial literacy every month we are happy here is a dedicated month to celebrate its importance! To truly understand Financial Literacy you must understand each of the Five Pillars of Financial Literacy.

Earn, Spend. Save. Borrow. Protect.

EARN

To set up a budget and spending plan you must first determine what you earn. This includes looking at your paycheck to identify your gross and net income. If you are part of the 32% of Americans that have an income that varies month-to-month then this can be a little tricky. However, you can still track your income based on your historical earnings.

If you want to improve your cash flow, check out this article from MoneyEdu.

SPEND

Track your spending.

To start, track your daily spending for at least a month or two. Even if you have a general idea of how you spend your money that doesn’t mean that’s how you actually spend it. For example, you might not have budgeted for those afternoon snacks you get from the gas station a few times a month. Small purchases like that can really add up. Tracking your spending can highlight those small but important financial decisions that we make every day.

Track your spending by collecting all receipts and tracking them using an app, an online resource like MoneyEdu (a free tool for our members), or just a pen and paper. Also, remember that this is a process. There may be some months that you spend more than your budget allows. Just make sure that the next month you spend less to make up for it.

Create a Budget.

Next, you can create a personal budget. Begin to put your expenses into categories using the information that you gathered. A good place to start is to use the 50/30/20 Rule where 50% is used for needs, 30% is used for wants, and 20% goes to savings or debt repayment. There are a lot of tools that you can use to create a plan for how you are spending your money. Check out MoneyEdu for a

SAVE

Determine your financial goals.

Focusing the amount of money you earn towards saving will be easier if you have specific financial goals. Some common financial goals that you might have are saving for an emergency fund, planning for retirement, or saving for a big purchase. Plus, to save on interest a goal might be to pay off your debt. Check out this article from MoneyEdu about Setting Financial Goals.

Create an emergency fund.

Inevitably, there will be times when you have to spend money that you have not accounted for in your budget. To prepare for these emergency positions set up an emergency fund. Plan to put a certain amount of money away each pay period to help cover these expenses as they arise. This will create less stress for you while trying to stick to your budget and spending plan. Use this calculator to determine how much money you should put away.

BORROW

The key to lending and credit.

Most people in their lifetime will need to get some sort of loan. There are some things to consider before getting a loan, the most important being debt-to-income ratio and credit score.

A rule developed by the CFPB states that 43% is the highest level that most lenders consider sustainable. That means if you divide your total monthly debt payments by your total monthly income you will want that number to be as low as possible but definitely under 43%.

Your credit score helps your ability to get a loan and a lower interest rate. Maintain and improve your score by paying bills on time, avoiding high credit card utilization, limiting hard credit inquiries, and monitoring your credit report. If you have a lower score you will be able to get a lower interest rate on a loan which could save you a lot of money over the life of the loan.

Click on the image below to watch a video from our Certified Credit Union Financial Counselor, Alyssa Walford on what credit is and how it works. She will go over the common misconceptions regarding credit scores and reports, and her insight into how to repair and improve your score.

The Five Pillars of Financial Literacy

Understanding Credit and How It Works

PROTECT

Don’t forget that protecting your hard-earned money is important but often overlooked. To prevent fraud, diligently check your bank accounts and credit card statements. Many mobile banking apps have alerts and ways to shut off your card immediately if fraud is suspected. Also, don’t give out your banking login credentials or other sensitive information to anyone for any reason. Make sure to have a critical mind when people ask you for money or sensitive information. Stay up-to-date on common scams and what to do if you’ve been scammed on the FTC website.

Another type of protection that you should look into is insurance. Insurance is a great way to protect your financial stability but does come at a cost. There are many different types of insurance but all work to help people with certain financial risks like medical, auto, homeowners, disability, and life insurance. It’s best to shop for a policy as soon as you determine you need it. Do your research and reach out to a financial advisor if you need help picking the right policy for you.

 

Reviewing the Five Pillars of Financial Literacy is a great place to start your financial literacy journey. Even if you are aware of the pillars it can be the motivation you need to step up your game. No matter where you are in your financial journey, please know we are here to help. Reach out to our in-house financial education expert, Alyssa Walford, if you need some direction to improve your financial literacy.

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