Since the pandemic’s onset, 91% of employees say they have faced a personal financial issue.
A personal financial issue could look like this:
- Struggling to maintain a household budget
- Reducing and paying off debt
- Building an emergency savings plan
- Keeping up with day-to-day bills
- Paying for an unexpected expense
Many times, Americans struggling with personal financial issues have no education on how to manage their finances. In other words, financial literacy is low.
Where should one start when building financial literacy?
5 Steps to Financial Literacy
Being financially literate can change one’s outlook toward money and ultimately guide one to make smarter financial decisions for years to come.
There are five main steps to prioritize to becoming financially literate.
1) Learn How to Budget
Budgeting is the most crucial step when becoming financially literate because it helps set boundaries around spending. Basic expenses, including the cost of living (rent/mortgages, food, gas, child care, etc.), are all generally set each month or estimated by looking at previous months.
This is a starting point when setting a budget so that basic expenses will be covered monthly and all other costs are supplementary.
2) Reduce Spending
Naturally, once a budget is set, reducing spending is a simple and efficient way to start implementing financial literacy practices.
Reduced spending could look like: fewer meals out of the house, coffee out twice a week, walk more to the store to save on gas. Any activity that can also be done at home or can save on basic expenses is an easy place to start.
It is also important to note that this can be started small. For example, setting a goal to eat out only twice per week for an entire month helps to build this new habit. Reduced spending does not have to be a significant change.
3) Open & Utilize a Savings Account
Once a budget is set, it is much easier to estimate the amount of money that should be set aside each month or paycheck to a savings account. In 2022, approximately 56% of Americans would be unable to cover an emergency expense of $1,000 or more.
Building an emergency savings fund is crucial to becoming financially literate as it demonstrates the importance of a backup plan.
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4) Understand Credit Scores
Credit scores, while simply a number, are vital to keeping up with finances.
Credit scores help lenders determine how trustworthy a person is, which comes into play when one rents or buys a home, purchases a car, takes out a loan, and so forth.
A lot goes into making one’s credit score and how it gets adjusted–increased or decreased. To learn more about credit scores, click here.
5) Understand & Expect Risk
Unexpected expenses are bound to happen, and they occur for everyone every year. In 2022, around 58% of Americans live paycheck to paycheck, with many unable to cover an emergency expense of $1.000 or more, as mentioned before.
The pandemic was a major unexpected event that challenged many’s abilities to live A financially secure life. With a budget, reduced spending, consistent contributions to a savings account, and an understanding of how credit scores are affected and adjusted, the ability to expect and prepare for risks becomes more attainable; in other words, financial literacy is more achievable.
Tips to Improve Financial Literacy
Employers are in an interesting place when it comes to finances because there are now so many great employee financial wellness benefits.
Here are a few ways employers can help improve financial literacy among their employees
- Offer a no-cost Financial Wellness Platform as part of the employee benefits program.
- Share financial newsletters and articles via email.
- Share financial podcasts with employees.
- Keep the door open with employees to discuss finances (wages, salaries, benefits) 24/7 without judgment.
On a Final Note
Financial literacy is a process that is developed by building smarter financial habits. Habits are formed by making small, incremental changes which sometimes require tools to help make these changes.
Education is a big piece of financial literacy, but if one is struggling with their finances now, education won’t help them to make these habit changes. They need tools, like a financial wellness platform, to help them get started.