How Financially Literate People Stay on Top of Their Money

Being financially literate doesn’t just mean you know how to read the Wall Street Journal. 

Financial literacy means having the ability to assess your financial situation so you can make the right decisions about money on a daily basis. But one in six students in the U.S. don’t meet the baseline level of proficiency in financial literacy, according to the Council for Economic Education. A survey conducted by the council found that on average, people estimate that they’ve lost $1,389  due to a lack of financial knowledge. 

Having a degree of financial literacy can help you manage your current life, while preparing you for unforeseen expenses and emergencies. It will also help you develop a financial plan for the future. That way you won’t be wasting your cash, or getting yourself into debt, or taking unnecessary financial risks. Acquiring financial literacy can also allow you to understand and participate in the economy. 

Achieving financial literacy is especially important in today’s world, where people face the highest inflation rate in decades, and the ongoing pandemic, which has affected everything from the job market to housing prices. 

Stash has assembled four things that financially literate people do  to maintain a solid financial foundation in 2022. 

Learn how to budget with inflation in mind

Building a budget is important no matter what the financial landscape looks like, but it’s particularly important now that inflation has pushed up the price of gas, groceries, and more. As of February 2022, the inflation rate, which is measured by the Consumer Price Index (CPI), was 7.9% for the year ending February 2022, the largest spike since 1982. Gas prices have surged 38% over that same period, while food prices have increased 7.9%. The cost of new vehicles went up 12.4%, and used cars and trucks jumped 41.2%.

Your budget should take your total income into account, and you should make sure there is ample room for your essential expenses such as food and gas, non-essential expenses like going to the movies, and saving and investing. “While you can’t stop prices from going up at the grocery store or when filling your tank, you can still make sure you’re hitting your goals by paying attention to your habits and adjusting where possible,” says Lauren Anastasio, a certified financial planner (CFP), and director of financial advice at Stash. 

Budgeting for inflation can help you make sure you’re not neglecting financial priorities, like saving for a house or retirement. Also, continue to stay informed on what the inflation rate is, and the Federal Reserve (the Fed) is doing to combat inflation. 

Make a plan to pay down your debt

Debt is also an obstacle many consumers deal with. In the last quarter of 2021, credit card debt increased by $52 billion, to $860 billion, the most significant quarterly jump in history. 

Smart use of credit can be an important part of becoming financially literate since it helps you build a credit history, and get a credit score. Your credit score is what banks and other institutions will reference when deciding whether or not to lend you money, rent you an apartment, and more. It’s important to pay down your debt so that you can build strong credit, which can help you reach your financial goals like taking out a loan for a business or getting a mortgage for a house. 

Try to pay off your credit card bill and other debt payments in full each month, since maintaining a balance can hurt your credit score. If you have a chunk of debt you need to tackle, make a plan to do so. You might want to start with the biggest debts, or those with the highest interest rates, which is known as the avalanche method. Or you might want to use the snowball method by starting with smaller payments and working your way up.

Save for emergencies and the future

Being financially literate also means knowing how much money you need to save for what you want, emergencies, and retirement, and building those savings. With the uncertainty brought on by the pandemic, having money in an emergency fund to fall back on is crucial. “The pandemic exposed just how little people were prepared for a loss of income or even their job,” says Brannon Lambert, a certified financial planner at Raleigh, North Carolina-based Canvasback Wealth Management.

Lambert recommends setting up an emergency fund in a savings or money market account. Stash suggests that an emergency fund should have three to six months worth of expenses in it. It should also be liquid, so that you can take it out at a moment’s notice if you need to. You should also start socking away money for future purchases, and for retirement with a 401(k) or an individual retirement account (IRA). You can open an IRA through Stash.

Invest to stay ahead of inflation and stay informed

If you’re able to, one way to stay ahead of inflation and to build your financial literacy (and hopefully savings) is by investing. While you’re not guaranteed a return on any investment, investing your money is a way to try and stay ahead of inflation. Hopefully, your return will outpace the rate of inflation. If the inflation rate is currently 2%, for a simple example, and your portfolio had a return of 5%, your real return would be 3%.

In order to invest wisely, you should also stay up-to-made on market and economic news. Learning about the economy and markets is also a way to increase your financial literacy. Sign up for Stash’s weekly newsletter, The Wallet, to stay informed.