Financial literacy components and how important they are to You

Financial literacy is important to individuals for risk transfer. It is also important to the economy in savings mobilization and capital allocation. Does the idea of making a major financial decision or even checking your bank account stress you? Having financial challenges might be out of your control but financial planning will equip you to handle whatever comes your way.

Being empowered to make good financial choices is called financial literacy. Financial literacy is the ability to make use of knowledge and skills to manage financial resources effectively. You should learn how to practice financial literacy for a lifetime of financial well-being. Lack of financial capability can make it hard to make major financial decisions. The article seeks to empower you which essential components of financial literacy.

Five components of financial literacy

Earn as you understand  your paycheck

Knowing the amount of money, you earn is important is financial literacy. You should really understand your paycheck. Before you start spending, saving, and investing, you need to know how much you make. If you make the same amount each month this part is easy. Take a good look of your pays lip to identify your gross and net income.

Note any other deductions such as employer -sponsored health insurance or a retirement plan. Calculating your income is a little difficult but it is important. Learn how to calculate gross and net income based on your historical earnings. Once you are determined your monthly net income, you are ready to spend responsibly with a personal budget

Spending within your personal budget boosts your financial literacy .

Creating a personal budget limit, you’re spending. You become so accountable that you spend within budget limits. A personal budget is a plan for how you want to spend your money. Similarly, it is a powerful tool for achieving your financial goals. To create a monthly personal budget, you will need to check your spending over the course of one month. Thereafter, break everything down into categories. It can be broad or specific for those who want to get into nitty gritty of our spending habits

Save as  your financial goals means you are utilizing your financial literacy skill .

Saving is necessary if you have financial goals. When talking about saving, most of you always say ‘I save you now so that you save me tomorrow ‘. With this, I hope everyone knows that it is important to save money. It is hard to spend less than you earn without specific financial goals to work towards. Your financial goals will depend on your unique situation.

For instance, First, you can save for an emergence fund. Setting aside some money in a designated emergence fund will get you peace of mind. At the same time, it will prevent financial setbacks from overtaking your life. Secondly, some of you plan for retirement. You might think that it is too early…but experts agree that the earlier you start saving for retirement the better. Thirdly, saving for a big purchase. Some of you always hope to possess something ‘big’. Whether you are hoping to buy a car or home, the sooner you start saving the less you will have to put aside each month. Lastly, paying off personal debt. Most people have debt. Can be student loan or credit card debt. Check the interest rates and your loans. Paying off your loan in time serves you better.


Borrowing finances is also important though most of you are always against it. Each one of you has borrowed at one time when you were financially unstable. Even if you are a diligent saver at some point you may have to borrow money. Maybe you will be aiming to cover a large expense like a home or a car. Borrowing is not bad if you know how to compare loans and maintain a healthy credit score. The higher the credit score the less interest you will be charged. Meaning if you have financial difficulties in the past, you can get stuck where all your money goes to paying your interest. Keeping a balance on the credit card is one of the easiest ways to track up debt. Choosing the right credit card improves your credit score.

Protect with the aim of preventing fraud .

It is important to protect the money that you have made. Aim to protect once you are set yourself up with a solid budget and investment strategy This means regularly reviewing your bank account and credit card statements for mistakes including suspicious activities. Keeping your documents and passwords secure to prevent scams and identity theft. Moreover, buying the right kind of insurance to protect yourself in the event of an emergence

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