Financial Literacy and Budgeting

Car loans and mortgages are a part of life for most Americans. Bills must be paid to keep the lights on. Groceries are an essential expense. All of these things require money, and unfortunately, mismanagement of available funds leads eight out of ten Americans into a fight against debt. The good news is that debt doesn't have to pursue a family into retirement. Debt can be reduced or completely eliminated with enough left over to secure a comfortable future. All it takes is some careful money management with basic financial literacy skills.

Financial literacy refers to an understanding of how money works within the realm of finance. This can encompass topics like loans, interest rates, investing, and tax planning. Accountants and bookkeepers are responsible for the money management of many businesses. However, a family has the same basic monetary needs as a business and, if not managed responsibly, can land in severe financial distress.

Financial literacy for the home begins with budgeting. The first step in creating a budget is to identify all monthly expenses, like power or water bills, transportation, mortgage payments, and groceries. Once all expenses have been identified, they can be compared to monthly income. Income refers to money that is gained through wages or a monthly stipend. With this information, it's a simple matter to determine whether there is any extra money left over after all bills have been paid. Extra income can be put into a savings or retirement account or invested to help accumulate additional income.

If monthly income is less than monthly expenses, as is the case with many American families, there are ways to help cut down on expenses. Making meals at home rather than dining out can drastically increase the amount of money kept. Trading or bartering items or skills removes money entirely from the equation. Frivolous purchases like a daily coffee may seem innocent enough, but one five-dollar coffee every day can lead to a loss of $150 every month. In that light, it may be tempting to put niceties like coffee on a credit card, but this kind of spending habit leads straight to greater financial challenges with debt.

Debt can take the form of a car loan, student loan, mortgage, or credit card. Credit cards are particularly alluring because they promise instant money that wouldn't otherwise be available. If debt accumulates on a credit card, the card holder will end up paying more to the company than they did for the item itself thanks to interest. An interest rate is the percentage of the loan that is then added to the total amount to pay for the privilege of borrowing and using money. Many companies charge an interest rate on loans or as a fee for providing the loan service.

However, interest can have a positive effect on savings accounts. Compound interest can transform modest savings into a large retirement fund. When looking for a savings account, be sure to shop around and compare interest rates between companies, as many offer drastically different rates. The same holds true for credit cards. Different rates can mean the difference between a minor inconvenience and a major headache. If you are presented with specific financial questions, seek the assistance of an accredited accountant or bookkeeper.

Developing financial literacy skills may seem imposing, but it really is much easier than it sounds. At its core, financial literacy is nothing more complicated than recording income and making a plan to pay off what is owed. There are plenty of free resources available online that provide a beginner's introduction to finance management. If more training is desired, many universities and colleges offer programs in financial literacy. Regardless of whether you're using them for a large corporation or a small home, financial literacy skills are the cornerstone to greater wealth and financial security.