Do you remember what your life was like before you learned to read?
Most American children learn to read around the age of six or seven. You might have seen them begin to decode small words and sentences, moving to more complicated text as their skills grow.
As they learn, their ability to see and interpret the world changes. It’s as if they gain a superpower—we call it literacy.
Financial literacy is a similar power.
But while the public school system requires text-based literacy, financial literacy is not mandatory. Not having this power causes a lot of unnecessary suffering for people who struggle to manage their money and build a stable future.
At Kudzu, we’re passionate about equipping people with the tools and information they need to unlock financial success.
And we believe that financial literacy is a superpower that anyone can have. No radioactive spider bites or genetic mutation required.
In this article, we’ll explore the foundations of financial literacy and suggest resources that can help you become more mindful about money.
What Is Financial Literacy?
Financial literacy is the ability to look at financial information and use it to your advantage. Ultimately, it’s intended to create stability and growth.
The opposite of financial literacy is financial ignorance. Lots of people are ignorant of basic financial concepts, not because they’re stupid, but because they haven’t had the chance to learn them.
Unlike text-based literacy, financial literacy isn’t taught in every school and it isn’t practiced by all families.
If your family struggled to make ends meet or manage debt, those behaviors could feel normal to you, even if they caused fights or hardship.
But stress and anxiety about money don’t have to be “normal.” Everyone can learn how to manage money and experience the peace and stability that comes with practicing financial literacy.
And the first thing to keep in mind is that financial success doesn’t look the same for everyone.
Like a first-grader learning to read a picture book, your first mark of financial success might be reading a bank statement or saving six months of spare change in a jar.
There is a step-by-step path to achieving success through financial literacy:
- Study financial material, such as books, courses, videos, and free online resources—you’re already off to a great start by reading this blog post!
- Apply the knowledge you’ve gained in real-life situations. That could mean something like packing your lunch for work to save money.
- Cultivate the attitudes and habits demonstrated by people who have proven their financial wisdom over the years. Making money isn’t the secret to financial freedom—saving it and growing it is.
Don’t get discouraged if your current situation feels far from ideal. Financial literacy is a journey that comes with setbacks, just like life. The most important decision you can make is to become a life-long student of financial literacy and give yourself the grace to learn from failures.
The Five Key Areas of Financial Literacy
Financial literacy can be broken down into five main areas: earn, save and invest, spend, borrow, and protect. Each area has basic concepts that everyone should learn. Once you’ve mastered those, you can move on to more advanced concepts.
The first three categories can be learned and practiced together, while the last two tend to come later as your financial life gets more complex.
Budgeting What You Earn
The first thing you should do is look at the money you’re bringing in every month. This could be money from a full-time or part-time job, government assistance, or wages from gig work.
Wherever it’s coming from, you need to know how much money you’re bringing in each paycheck and what money, if any, is being deducted or withheld.
Once you have a good idea of your income and how it’s broken up, you can begin building a budget. In short, a budget is your plan for how you’re going to use the money you bring in.
There are lots of ways to budget, so look for the one that fits your personality and situation. The best budget is the one you use—and stick to.
Saving and Investing
Setting aside money every month (“saving”) is a vital part of building a budget. Many financial advisors will also recommend that you automate your savings so it happens before the rest of your bills.
Even if you start with spare change or putting a few dollars a month into a savings account, you will prove to yourself that saving money is possible.
Once you have this habit in place, it will allow you to put the money to work by investing into better savings accounts (where the money earns interest) or the stock market, where it can earn a higher return.
For some people, putting money in a 401(k) or Roth IRA is a reliable way to start investing and keep things simple.
While investing can seem one of the most complicated financial topics, it’s easier than it’s ever been for average Americans to invest small amounts of money and watch it grow—provided you follow the guidance of informed advisors.
High-risk or “speculative” investments such as cryptocurrency are not recommended for anyone who is a new investor.
The principles of saving and investing can be boiled down to one idea: rewarding your future self. When you save money and allow it to grow, it becomes money that you can use later without borrowing or needing to make more.
Spending
This might seem like the easiest category of financial literacy because everybody is doing it already. Walk into a grocery store with a small child, and they’re desperate to spend money. For adults, smartphones and the internet have made it possible to spend money without even thinking about it.
And that’s why spending is dangerous: If you spend without thinking or budgeting, you’ll always spend more than you make. When you spend more than you make, it forces you to borrow money or incur penalties when you can’t pay your bills.
Once you have a sense of where you spend your money, it’s much easier to cut expenses and put that money elsewhere.
If you’re living on a fixed income or a job with few prospects for promotion, it’s vital that you find ways to keep your expenses low so that you can save money and build up a cushion.
Borrowing and Debt Management
If investing is about rewarding your future self, debt is a form of punishment for your future self. When you borrow money from banks, credit card companies, and other lenders, you pay interest on that money.
Debt can be an important financial tool, but if you don’t understand how debt and interest work, it can lead to unnecessary suffering and even bankruptcy.
Once you learn how the different types of loans and credit work, you can use them to your advantage. That’s why financial literacy around debt is so important.
Debt can be a painful subject for people who have experienced its negative effects or gone through bankruptcy. The truth is that many people end up in too much debt because they weren’t taught any different.
However, even if you’re currently struggling with a high debt load, there are ways for you to grow! There are many resources and programs to help people pay off debt and achieve financial freedom.
Protect Your Money With Financial Planning
While budgeting is about looking at the money you have this month or next month, financial planning is about deciding how to use your money in the future: A year, five years, or ten years from now.
Your financial plan can include goals such as:
- Pay off high-interest loans and credit card debt.
- Save $1,000 for an emergency fund.
- Automate your 401(k) contributions.
- Save for a new pair of shoes.
Financial literacy and planning aren’t about saying “no” to all the good things in life. And there isn’t one right answer for how to create a financial plan. In fact, financial planning is the key to having more of the good things in life and spending without guilt or anxiety.
Your financial plan will change over time. As you achieve your first goals, you’ll gain the confidence to set bigger goals.
Bonus Principle: Taxation
This isn’t one of the five areas that the government includes in mymoney.gov, but it’s certainly an important part of financial literacy.
For most salaried and hourly employees, taxes are automatically deducted from your wages based on information you provide, such as family size. That makes filing your taxes fairly simple and can result in a big, exciting refund.
As your financial skills and your savings grow, your tax situation will grow more complex. You’ll report your savings and investments. You’ll deduct interest from certain loans.
It can feel overwhelming on the front end, but don’t worry! The tax code is a system of rules, and there are professional tax accountants (and free tax software) who can help you navigate it with confidence.
The most important thing is to file your taxes every year and report your numbers truthfully. A financial planner and a reputable tax accountant can help you optimize your financial plan and minimize your tax liability (the amount you expect to pay).
Why Financial Literacy Can Help Your Life
Whether it’s the 42% of Americans who don’t have an emergency fund or the 53% of Americans who feel behind on their retirement plan, it’s clear that most people are struggling to achieve financial freedom and the peace that goes with it.
Studying and practicing financial literacy is about more than just spending less and saving more. It can help you reduce stress and experience the joy of guilt-free generosity—it’s a lot easier to buy a nice gift for your spouse if you aren’t thinking about paying 30% credit card interest.
When you budget and plan how to use your money, you’ll also have greater economic mobility and opportunity. You can make major life purchases like a home and even put aside money for your children’s college tuition.
The secret to building savings and happiness is to treat money as the means to an end, not the goal itself. Money can be a vehicle for a life of gratitude and generosity, if you begin practicing those things right now.
How To Improve Your Financial Literacy
Like we discussed earlier, the way to become financially literate is to study the principles and regularly practice them.
There are lots of helpful resources on financial literacy, including books, courses, podcasts, and thousands of blogs. You can also draw on the wisdom of friends and loved ones who have demonstrated financial responsibility—don’t be afraid to ask for help.
Once you’ve started learning the basics, you need to put that knowledge to work. That can happen by building habits over time and finding the systems that work for you.
It’s also a good idea to use tools like Kudzu, which help you track your spending and build your savings.
Play Long, Stay Strong
There’s no silver bullet that will fix your money situation overnight, but there are lots of simple, repeatable things you can do to grow your financial literacy and achieve financial stability.
The economy isn’t something you can control. Inflation and employment uncertainty make it hard to stay in your budget or plan ahead. But you shouldn’t let those issues control your future, especially when there are ways to create financial security right now.
Kudzu’s app helps you master both sides of the financial literacy equation: Study and practice. Kudzu makes it easy to learn the principles of financial freedom through PayPerks1, and put those principles into practice with features like SpendSense Alerts2 and Savings Habits.
