What is financial literacy?
If you’ve heard the term financial literacy thrown around, it’s not about being fluent in accounting lingo (although that can help). According to the United States Treasury’s Financial Literacy and Education Commission, financial literacy is “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial wellbeing.”
Lack of financial capability can make it hard to make major financial decisions like opening the right kinds of bank accounts, planning for retirement, and paying off personal debts from student loans or credit cards.
So how do you become financially literate? Some high schools and colleges offer courses in money management, but if yours didn’t, or you’re looking for a refresher, start with a few simple concepts. According to the Financial Literacy and Education Commission, there are five key components of financial literacy: earn, spend, save and invest, borrow, and protect.
Earn: Understanding your paycheck
Before you can start spending, saving, and investing, you need to know how much money you make. If you make the same amount each month, this part is pretty easy. Take a good look at your paycheck to identify your gross and net income, and note any other deductions, such as employer-sponsored health insurance or a retirement plan.
If you’re one of the 32% of Americans whose income varies from month to month, calculating your income can be a little more difficult, but it’s still important. Learn how to calculate gross and net income based on your historical earnings here. Once you’ve determined your monthly net income, you’re ready to spend (responsibly!) with a personal budget.