How to apply financial literacy knowledge
Just like learning anything new, it takes more than repeating facts and definitions to really understand financial literacy on the level you need in order to be successful. Teachers know you have6 levelsthat come into play with cognitive learning – which is the type of understanding you really need. Applying these 6 levels of learning to finance, you have to:
- Knowthe basic terms and concepts related a particular financial topic.
- Comprehendthat topic at a level where you really understand the concept and how it applies to your daily life.
- Then youApplythat knowledge to your own finances so you can build and grow a solid financial foundation.
- Once applied, youAnalyzethe impact of the actions you took and adjust as needed. This is where you pay close attention to the nitty-gritty details that can make or break your strategy.
- After you’ve tweaked the application, youSynthesizethat into your overall financial plan. (Synthesis is essentially where you fit a specific topic into your big picture.)
- Finally, you’re ready toEvaluateyour success on that particular topic so you can circle back to gain more knowledge or move on to the next topic you need to understand and incorporate in your daily financial life.
8 basic areas of financial understanding
Your financial life isn’t just one big hom*ologous lump – it’s a well-oiled engine that helps you move forward, and it has a lot of moving parts that go into making it work smoothly. With that in mind, it can be helpful to break the whole into different areas so you can know where and how you need to focus to expand your understanding. One way to divide your financial understanding is by breaking it into eight basic categories:
- Budgetingis your ability to understand topics that relate to daily money management. It includes concepts like: income sources, fixed/flexible/discretionary expenses, monthly payment obligations.
- Savingis your ability to set money aside and allocate funds in order to invest in your future. That means you have to understand concepts like savings accounts, interest, yield, and even investment topics like securities.
- Basic needs managementis where you have the ability to handle all of the costs related to life necessities, such as housing and transportation. This means monthly bill management, and even understanding insurance.
- Bankingrelates to the fine details of managing your accounts. This means you need to have the ability to understand your accounts, how they work, and any fees, rates or terms that may be applied.
- Healthcare cost managementcan be tricky, because it involves understanding complex topics such as health insurance, deductibles, and coverage. Medical costs have a way of breaking even the most stable budgets if you don’t have a good knowledge base on this topic.
- Debt managementis your ability to effectively take on debt, understand the terms and rates that apply to things like loans and your credit cards. Without a solid understanding, debt can easily overwhelm your finances.
- Credit managementis your ability to manage and maintain your credit profile. That includes your credit score, credit reporting, and how you interact with the credit bureaus if you have an issue. Laws are constantly evolving to change credit management.
- Retirement planningactually incorporates several of the above topics like budgeting and saving, but then applying them the long-term financial planning that’s required to be stable in your gold years. You have to understand special concepts like 401(k) and IRA accounts and employer match programs.
By building your knowledge in these eight areas, you should be able to achieve financial stability and overcome the typical challenges that consumers can face in their day-to-day financial lives.
Why we struggle with financial literacy
Personal finance isn’t something most of us were taught in school – or if we were, we only received a few basic lessons. What’s more, with the rapid expansion of technology, some of the lessons we learned aren’t even applicable. For instance, many older consumers may have learned how to balance a checkbook – a critical skill a few decades ago that hardly comes up in today’s world. So without a proper education, most of us start life behind when it comes to financial literacy, and then the problem is compounded by how fast the financial world is evolving. As a result, we often rely on our parents for the knowledge we need, who learned everything they know the same way. You pass down the trial and error you learned from the hard way to your kids in the hopes they have an easier time.
What you can do
You have to start by building your own knowledge base. You can use thefree resourcesyou find online to get started. Look at the eight topics above and feel out where your knowledge is lacking. If you’re not sure, you can take our Financial Literacy Test to see where you may be weak. We also offer a Financial Literacy Check List that helps you build a better outlook in 30 days. And once you have your own knowledge base established, you should also share that knowledge with the rest of your family – particularly with your children. The more of a head start you can give them, the better off they’ll be once they get out on their own!
More Resources for Building Financial Literacy
Financial Literacy Test
Not sure if you have the basic financial knowledge level that you really need to be successful? Take the test to find out now! Consolidated Credit offers a simple 20-question test to find out if you really know what you need to know to maintain stability in your daily life even in the face of financial challenges.Test your financial knowledge now »
Financial Literacy Statistics
A 2023 study found that if you graded each state in terms of the financial literacy of its residents, only 17 of 50 received a passing score of a B rating or higher. Unfortunately, three states plus Washington D.C. scored an F.Find the latest national financial literacy statistics »
30-Day FinLit Check List
April is National Financial Literacy Month, which makes it the perfect time to build your know-how and brush up on some basic concepts you need to know if you want to be successful. We help you make a plan to achieve a better understanding of your finances that you can complete in just one month. You give us 30 days, and we can help you establish the foundation you need to be successful.Get a 30-day road map for building your knowledge base »
