January 22, 2024 | Alexa Johnson
Demystifying Financial Literacy
As we navigate the course of life, financial literacy emerges as a fundamental skill set. But what is financial literacy? Simply put, financial literacy refers to the comprehension of various financial principles and tools needed to make informed and effective decisions regarding one’s financial resources.
Digging deeper, financial literacy covers several key areas:
Budgeting: This is the practice of creating a plan for your income and expenses. It involves categorizing spending and tracking it to ensure you live within your means and save for future goals.
Saving and Investing: Understanding the difference between saving — putting money aside for short-term goals — and investing — allocating money for long-term growth — is crucial. Knowledge about compounding interest, risk and return, and different types of investment vehicles is also included in this area.
Debt Management: This includes understanding various forms of debt like credit cards, student loans, and mortgages, and how to manage them. It’s important to know how interest on debt works, and the consequences of defaulting on debt payments.
Understanding Financial Products: From insurance policies to retirement accounts, there is a wide array of financial products. Knowledge about these tools, their benefits, costs, and how to choose the right ones based on individual financial goals is part of financial literacy.
Financial Planning: This involves setting short-term and long-term financial goals and creating a roadmap to achieve them. This could include planning for retirement, children’s education, or buying a home.
For aspiring homeowners, a specialized subset of financial literacy comes into play — financial literacy for homeowners. This involves an understanding of home loans, mortgages, property taxes, home insurance, and the ongoing costs associated with homeownership.