Six Financial Literacy Basics Everyone Should Know

Financial literacy basics are so important in order to manage your money, but they’re not taught often enough. When I was in school we learnt nothing about money even though it would have been really useful to know. I wish I’d been taught about taxes and self-employment, pensions and the importance of having one, and what compound interest is.

Things may have changed in schools now, but most people tend to learn from their family and people around them or the internet.

There’s never been a better time to learn some financial literacy basics so you’re in control of your cash. It doesn’t take long to build foundation skills in personal finance.

Why financial literacy basics are so important

Financial literacy includes understanding budgeting, banking and planning for the future. It also includes knowing about investing and handling debt. Once you know the basics you’ll be able to make the best decisions for your finances.

It’s important because:

• You’ll be able to reach your financial goals easier and quicker
• You can pass the knowledge down to your kids and set them on the right path. The earlier they start learning the basics the better
• Knowing more about money and your finances will help reduce stress and anxiety in this area. It may also improve relationships with your family or partner if you argue about money
• Overall you’ll just have better money management and be more in control

Financial literacy basics- banking

Bank accounts are a safe way to store your money and you’ll need one to get wages paid into or start investing/ earning interest on money.

You can choose from a traditional bank that has physical locations, or a digital bank who don’t have locations. There are lots of different accounts you can open but you’d start with a current account. A current account is your day-to-day account where you can get your salary paid. You’ll get access to a card which you can spend or withdraw money from it.

You can also open various different savings accounts to put money aside and earn interest. There are lots of different options with different conditions and interest rates.

Your savings are protected by the Financial Services Compensation Scheme (FSCS) to cover people’s savings in the event the bank goes bust. They protect 100% of the first £85,000 you have saved per financial institution (not per account). So if you had more than £85,000 you may be best to split it across several different banks.

Always do your research before opening an account to make sure it’s the best one for you.

Emergency funds

It may feel tough to be able to save at the moment, but having an emergency fund is so important. This money can cover you if you’re unable to work, or an emergency happens such as your car breaking down or your boiler failing and needing to be replaced.

Having an emergency fund offers peace of mind if something happens. It can also prevent you from getting into debt if an emergency does happen.

For us, our eventual aim is to have an emergency fund three times my monthly wage so if I was made redundant I’d have three months’ money aside.

Financial literacy basics- debit and credit cards

Everything now is digital, most people don’t carry around cash with them and will instead use cards.  And with the rise of Apple and Android Pay, you can use your phone or smartwatch to pay for items.

Your debit card is linked to a bank account and every time you spend the sum will be deducted from the balance in your account. With some accounts, you can set up overdrafts allowing you to spend more than you have, but this shouldn’t be relied on for everyday spending.

Credit cards will give you a maximum limit you can borrow from a provider. Money won’t come directly to your bank account but each month you’ll have to pay off your balance. If you pay it all off you’ll pay no interest, but if you don’t interest will be charged.

Using a credit card smartly and paying it off can help your credit score and show you are a responsible customer.

How credit scores work

Anytime you apply for credit from a phone contract and shop credit to a mortgage lenders will check your credit score.

The score shows how responsible you are to lend. If you’ve got a low score you may be seen as unreliable so lenders will offer you less money, and charge you a higher interest rate as you’re a riskier person to lend to.

There are a few different credit score companies, and your score is based on a number of factors. Find out how to increase your score now.

Financial literacy basics- taking out a loan

A loan can fund a large purchase such as buying a car or paying for home improvements and allow you to spread back the cost of paying it back.

Loans can be a massive help for larger purchases, but you need to know how they work.

Any plan will have an APR which is the annual percentage rate and refers to the amount of interest you’ll pay. And the APR rate on loans can be as low as say 3% or as high as 40% so you need to pay close attention. The APR you’re offered will depend on your credit score as mentioned above.

If you take out a loan and do not pay back your monthly amount it can negatively affect your credit score and cause you problems with additional interest and charges. So only take out a loan if you can comfortably afford to pay it back.

Budgeting and managing your money

One of the most important financial literacy basics is learning how to budget. Having a solid budget you can work with will help you manage your money and achieve your financial goals.

By having a budget you will know how much income you have coming in and how/ where you are going to spend that money.

There are lots of different budgeting methods, so look into them and see what works best for you. There’s the 50/30/20 method, cash stuffing, priority budgeting, reverse budgeting, zero-based budgeting and so many more. We use a mixture of zero-based and priority budgeting.

If you’re just starting to budget then the reverse budgeting method may be best. You pay yourself first, for example, 20% of your income and then use the rest for expenses.

What are the financial literacy basics you rely on?

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