Have you found yourself struggling to understand how to properly budget, save, or invest? If your answer is yes, this blog can help. In celebration of financial literacy month, the School of ACE Blog is providing some financial challenges to help you improve your financial well-being.
Financial literacy month is a great time to reflect on your personal finance weaknesses and the opportunity to turn them into strengths.
What is Financial Literacy?
Financial literacy is the ability to understand and implement different financial skills such as budgeting, saving, and investing. In addition, it also refers to your relationship with money.
If you want more from your money, commit to saving more or complete some of these challenges.
Assess Your Personal Finances
To achieve financial literacy, you must first start by assessing your personal finances and understanding the value of a budget. Having a well-formed budget will help you track your spending habits, getting you on track for the following challenges: eliminating debt, saving, and investing. If you haven’t built a budget before, our budget for beginners provides a step-by-step process.
This can include:
- Getting a hold of your credit report
- Understanding your household expenses and income
- Set spending goals
- Create a spending plan
- Choosing a budget template
Take your time on this first challenge, as it will be the building block for your financial capability.
Build an Emergency Fund
Unfortunately, unexpected events in our life often have costly price tags, so having an emergency fund is helpful when trying to achieve your financial goals.
When building an emergency fund, understand that it will take time. But don’t let time discourage you. Like most steps in personal finance, saving an emergency fund is a marathon, not a sprint. Here are some things you’ll need to know before planning how to build your emergency fund.
How much do I need to save?
Emergency funds can help save the day when you need them but figuring how much you’ll need to have can be tricky. According to the popular rule of thumb, you should aim to save between three and six months’ worth of expenses. Therefore, creating a budget and understanding your household and other expenses is important when calculating this amount.
Where do I save my Emergency Fund?
Money market funds and high-yield savings accounts are two great places to deposit your emergency fund. These options are highly recommended because your funds will grow, and it is harder for you to dip into it outside of an emergency.
Pay Down Your Debt
One key to financial literacy is learning how to manage your debt. This includes all debt connected to credit cards, auto loans, mortgages, and personal or student loans. Getting your debt-to-income ratio under control is essential to your financial future. Your credit score demonstrates your history of paying your debts to the entities that loan you money, such as credit card companies and financial institutions.
A spotty credit report has wider-ranging consequences than you might think, such as,
- Higher interest rates
- Paying more for auto, renter’s, or homeowner’s insurance.
- Landing a job (Employers may run a credit check before offering you a job, especially if you’re applying for a management position or one that involves handling money)
It’s hard to overstate the importance of your credit report. At the same time, it’s not the end of the world if your credit score isn’t exactly where you want it to be now, but you must start creating a plan to build up your score by paying down debt.
Invest in Your Retirement
For many busy working-class people, saving money and thinking about setting up a retirement plan is the last thing that they want to think about. However, investing in your retirement can help set you up financially in the future. With the payments from social security only replacing 40% of the average wage earner’s income after retiring, a general rule of thumb indicates retirees need about 70%-80% of their pre-retirement income to sustain a similar standard of living in retirement.
How Do You Plan for Retirement?
Like an emergency fund, investing in your retirement it is a marathon. It is also important to note that building your retirement plan will require you to gather various information to create a plan that will work best for your future financial goals. Use the information below to help you prepare for your retirement.
When can you retire?
There are several factors to consider when thinking about your retirement timeline, including:
- Age you want to retire
- How long it will take to save up for retirement
- How many years you can live off your retirement savings
- How long you can keep up with the demands of your job
It is important to consider if you qualify for social security and how much you would receive at your desired retirement age.
How much do I need to save?
The size of your retirement amount should be based on the lifestyle you expect to live, and the amount needed to sustain it. Using this and the retirement timeline you determined in the first step, you can calculate how much you can start investing to achieve your ideal retirement amount.
For more information on retirement, ACE offers a beginner’s guide to retirement to help you get your retirement plan on track.