Financial literacy doesn’t happen overnight. Just as a child learns to become literate through reading and writing, people become more financially literate in a gradual way, starting with the basics and building fluency over time.
The place where everyone should start to build their financial literacy is through budgeting. At an elementary level, making a budget helps people see how money comes in and out of their lives. It’s easy to do at first, but as financial decisions become more complicated the budgeting process does too.
But let’s start with the basics, and share resources that can help you build your financial literacy along the way.
Budgeting sounds complicated, but there are really only two components—income and expenses. Your expenses can’t be more than your income, and ideally you want to budget to have some income left over at the end of each month to build emergency savings or put toward other financial goals.
The income component is obvious—it’s the amount of money you earn from employment in a month. Where budgeting can get complicated is in capturing all of your expenses over the course of a month. It’s easy to overlook small spending—a lunch here, a coffee there—but these little purchases add up during the month and can dent your budget if you don’t account for them.
Here are some good resources for taking the first step to develop your household budget.
- Value Penguin: “How to Make a Budget
- AARP Budgeting Worksheet
Taking the next step
Understanding the forces that shape your financial picture is the next step in the budgeting process.
For example, where you choose to live is about more than the physical space of your home, condo or apartment. It influences your transportation expenses, how much you spend filling up your gas tank or on repairs to your vehicle. It influences your insurance costs, not only for your residence but also for your vehicle. You should also give consideration to taxes and maintenance costs—every home requires some financial investment for upkeep.
When you see how your financial choices and household budget are intertwined, you can make better decisions to help you stick with your budget and not overspend your income.
Here are some resources you can refer to when you’re considering how those major financial decisions affect your household spending:
Flex your financial expertise
The reason why you should budget is that it helps you plan ahead. There will always be unexpected circumstances that require a large amount of money: car repairs, education expenses, a visit to a hospital emergency room. Having money on hand to cover the cost of these surprises can help you avoid going into debt as a solution.
Building an emergency fund is essential financial planning for every one. But instead of putting away money left over after all of your monthly spending, you should earmark money within your budget for your emergency fund. Save it first, before you have the opportunity to spend it.
Once you have an emergency fund in place, you can start to plan ahead for bigger goals. For many younger adults, buying a home is a major goal that requires saving money for a down payment. But you should save ahead for other major purchases as well, such as travel and transportation.
Here are some resources to help you plan for the major financial expenses in the future: