Key components of financial literacy

FINANCIAL literacy is “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.

Lack of financial capability can make it hard to make major financial decisions like opening the right kinds of bank accounts, planning for retirement, and paying off personal debts from student loans or credit cards.

So how do you become financially literate? Some high schools and colleges offer courses in money management, but if yours did not , or you are looking for a refresher, start with a few simple concepts.

ere are five key components of financial literacy: earn, spend, save and invest, borrow, and protect.

Earn: Understanding your paycheck

Before you can start spending, saving, and investing, you need to know how much money you make. If you make the same amount each month, this part is pretty easy. Take a good look at your paycheck to identify your gross and net income, and note any other deductions, such as employer-sponsored health insurance or a retirement plan.

If you’re one of few whose income varies from month to month, calculating your income can be a little more difficult, but it’s still important.

Learn how to calculate gross and net income based on your historical earnings here. Once you’ve determined your monthly net income, you’re ready to spend (responsibly!) with a personal budget.

Spend: Creating a personal budget

A personal budget is just a plan for how you want to spend your money, but it’s also the most useful tool for achieving your financial goals.

To create a monthly personal budget, you’ll need to track your spending over the course of one month, and then break everything down into categories.

ese can be broad, as in the popular 50 30 20 budgeting rule, or specific, for those of us who want to get into the nitty gritty of our spending habits.

Save: Determining your goals

Everyone knows it’s important to save money, but it’s hard to spend less than you earn without specific financial goals to work towards. Your financial goals will depend on your unique situation, but should include:

Saving for an emergency fund. Setting aside some money in a designated emergency fund will give you peace of mind, and also prevent a financial setback from overtaking your life. Financial experts recommend having at least three months’ worth of basic living expenses in an emergency fund.

•Planning for retirement. e experts agree: e earlier you start saving for retirement, the better. Most financial planners suggest setting aside at least 10% of your take-home pay each month for retirement savings in a 401(k), IRA, or both.

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Saving for a big purchase. Whether you’re hoping to buy a car, a home, or pay for graduate school, the sooner you start saving, the less you’ll have to put aside each month.

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Paying off personal debts. Most people have some kind of debt, whether that’s student loans, credit card debt, or both. Check the