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People often say that knowledge is power. When it comes to knowing about money, that old adage is spot on. Financial literacy is one of the most life-changing gifts you can treat yourself to because it helps demystify money topics so that you can get the most out of your hard-earned dollars. To prove it, here are five key ways that educating yourself about personal finance pays you back over and over again.
1. Leads to smarter financial decisions.
Life is full of decisions that involve money. Here are just a few of them:
- Applying for a credit card - Taking out a student loan - Getting an auto loan - Buying a home and financing it through a mortgage - Opening a home equity line of credit - Investing in an employer-sponsored 401(K) or IRA - Taking out an insurance policy
- Opening a checking or online savings account
The more informed you are, the easier it is to face decisions like these and make choices that serve you today and in the long run.
2. Helps you understand the importance of a budget.
Depending on your situation, living beyond your means, i.e., spending more than you make, can be very tempting or even seem necessary if you don’t have a budget. That can lead to a perpetual cycle of money insecurity, which is why budgeting is one of the critical elements of financial literacy. As you work toward a higher money IQ, you’ll figure out the following:
- Whether you want to track your budget on paper, in a spreadsheet or via a budgeting app like a digital budgeting app like You Need a Budget, EveryDollar, or PocketGuard - What tips can help you stay within budget - When it’s time to reevaluate your budget
- How to create a basic budget
3. Teaches you how to pay off credit card debt quicker.
The average credit card balance in 2024 is approximately $6,580. Through financial literacy, you can learn more about the three methods often recommended for paying down credit card balances in order to decide which one makes the most sense for your particular situation and which one will be most motivating for your personality:
- Debt avalanche: Pays off the credit card with the highest interest rate first. - Debt consolidation: Involves opening a new loan or credit card with a lower interest rate and transferring all credit card balances to it for one monthly payment at that lower rate.
- Debt snowball:Pays off the smallest balance first.
4. Facilitates your big financial goals.
Being more financially literate helps you achieve your major goals sooner rather than later and often with less stress no matter what you have planned for the future, such as:
- A major home renovation - A vehicle for everyday use or a classic car to start or add to your collection - Your own college or graduate education or that of your children or grandchildren - World travel - An art or other type of collection - An early or worry-free retirement
- Your first home, a bigger one for a growing family or a vacation home
Additionally, with more money knowledge, you can feel more confident about when and how to fulfill less substantial, but still costly, goals such as buying an engagement ring or other fine jewelry, purchasing new furniture or appliances for your home, taking care of a major home or car repair, or adding a puppy to your household or another type of pet.
5. Allows you to teach your kids better money skills.
Perhaps best of all, you can pass your money knowledge on to your children so that they learn how to be financially literate at a young age, which reduces the chance that you’ll need to support them in their adulthood. And in case your adult children move back home, you can use what you’ve learned to help reset them for success.
Getting Started on Your Financial Literacy Journey
Fortunately, you don’t have to have a finance degree or work on Wall Street or in a bank or credit union to increase your financial literacy. In many cases, the answers to your money questions can be accessed for free through library books, podcasts and online blogs, such as this Learning Hub. Just make sure that the person or organization that wrote the article or hosted the podcast is a credible and reputable source, i.e., they have a proven track record of publishing factual and accurate information.
To get started, make a plan for building your financial literacy, such as:
- Listening to one personal finance podcast a week, and/or - Studying one money-related article a day.
- Reading one book a month on the topic,
If you’re not sure where to find these resources, ask your local librarian, personal banker, accountant or a financially savvy friend or family member for recommendations.
Editor’s note: Quorum is not affiliated with any of the companies mentioned in this article and derives no benefit from these businesses for placement in this article.
