Three Key Components of Financial Literacy
Financial feats that were once unheard of—from investing in cryptocurrency to instantly paying someone through an online payment system—have now become commonplace in many parts of the country. But these sophisticated tasks must be built on a foundation of financial literacy.
Without the tools to make wise financial decisions, taking advantage of these high-tech transactions might expose users to an increased risk of fraud, or a rising debt burden. Read on to learn more about three key components of financial literacy.
An Up-to-Date Budget
Some tend to look at the word “budget” as tantamount to the word “diet,” but at its most basic, a budget is just a spending plan.1 Knowing where your dollars are going (and where they need to go) can keep you from unconscious overspending and also help you put aside funds for saving goals.
Creating a budget doesn’t need to be complicated, nor will it require you to do much math—in fact, there are a variety of different online budgeting apps that can help. The level of detail in your budget is a personal preference; some prefer to have multiple broad categories, while others may want to place all expenses into very specific categories. For example, some might lump “pet food” in with their grocery budget, while others can break out this expense into its own budget category.
Once you have a budget in place, you can adjust it as needed as your income and expenses change. Doing so can help you avoid “lifestyle creep,” or having your expenses slowly rise to meet your available income even without planning to spend more.
Dedicated Savings (and Saving to Spend)
Setting aside a portion of your income in a savings account is one of the most basic ways to boost your financial reserves. But for many, it can be easy to become discouraged when expenses crop up and require you to dip into your savings. This is one reason it’s important to put your savings into two categories: saving for the future and saving to spend.
Saving for the future can include retirement savings in a 401(k) or IRA or generalized savings for a future goal (like a down payment on a house, or your child’s college tuition).
Saving to spend can include savings earmarked for infrequent but regular expenses like your auto insurance premium, winter heating fuel, new tires, or an unexpected medical expense.
Categorizing your savings in this way can help you shift your reaction to unexpected expenses—instead of being discouraged that your savings balance is going down, you can be glad you had these emergency funds available so you could avoid paying interest on that expense.
ID Theft Prevention
Nearly 18 million Americans experience identity theft each year, with a combined average loss of more than $1,300 per victim in 2014. One major component of financial literacy includes being able to ferret out scam attempts from legitimate communications.
Some rules of thumb include:
- Making sure your passwords are secure and hard to crack. (Using a capital letter, a lowercase letter, a number, and a symbol can be a good way to avoid easy detection).2
- Keeping an eye on your bank and credit accounts to quickly spot any suspicious charges or deductions.3
- Periodically checking your annual credit report to make sure no new accounts have been opened in your name.4
- Not providing any sensitive financial information to anyone who calls you on the phone. (The IRS, credit card companies, most online retailers, and banks will send you a written communication if they require your assistance.)5
In some cases, especially if you’re not planning to take out a loan anytime soon, it may make sense to freeze your credit. This prevents anyone (including you) from taking on new credit until and unless you unlock your account.6
By keeping these three components of financial literacy in mind, you’ll have the tools you need to navigate and improve your financial future.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
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