The definitive manual for adults on financial literacy

We are aware that your chances of being successful and confident with your money later in life increase with the age at which you learn the fundamentals of money management. Although it's never too late to begin studying, it's best to get started as soon as possible. The first steps into the world of finance begin with understanding the importance of acquiring knowledge and developing sound financial practices, followed by instruction on how to do so.

The majority of the financial decisions we will make in our lifetimes are supported by the following pillars: banking, budgeting, saving, credit, debt, and investing. Investopedia offers more than 36,000 articles, terminology, Frequently Asked Questions (FAQs), and videos that cover these subjects.

Today is an excellent day to begin using this guide, which is a terrific place to start. Let's start with financial literacy: what is it and how can it help you live a better life?

Important Takeaways

The capacity to comprehend and use a range of financial abilities is known as financial literacy.

Compared to individuals with lower levels of financial literacy, those with higher levels are more likely to open a retirement account, save for emergencies, and spend a smaller portion of their income.

Banking, budgeting, managing credit and debt, and investing are a few of the fundamentals of financial literacy and how it is used in daily life.

Financial Literacy: What Is It?

The capacity to comprehend and use a range of financial abilities, such as investing, budgeting, and personal financial management, is known as financial literacy. It also entails understanding certain financial ideas and concepts, like compound interest, debt management, time worth of money, and financial planning.

People can steer clear of bad financial judgments by becoming financially literate. It can assist them in achieving financial stability and self-sufficiency. Learning how to make a budget, monitor spending, settle debt, and make retirement plans are all essential components of achieving financial literacy.

Learning how money works, establishing and reaching financial objectives, recognizing unethical or discriminatory financial activities, and handling financial obstacles that life presents are all part of educating yourself on these subjects.

The Value of Financial Knowledge

Americans with greater financial literacy were more likely to make ends meet, save less of their income, establish a three-month emergency fund, and open a retirement account than those with lower financial literacy, according to the Financial Industry Regulatory Authority's (FINRA) National Financial Capability Study.

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It's more crucial than ever to make wise financial decisions. Consider retirement planning. In the past, many employees relied on pension plans to finance their retirement, with the governments or businesses that sponsored them bearing the financial burden and making the decisions regarding the pension funds.

Few employees receive pensions these days; instead, some are allowed to enroll in a 401(k) plan. This includes choices on investment options and contribution levels that must be made by the employees themselves. A comfortable retirement may be beyond the reach of even 401(k) contributions. Individual retirement accounts (IRAs) and other tax-advantaged retirement funds must be actively sought out and opened by those without workplace options.

Along with longer retirements due to people living longer, Social Security benefits that hardly cover basic necessities, complicated health or other insurance options, a wide range of options from banks, credit unions, brokerage firms, credit card companies, and more, there are also more complicated savings and investment options.

It is obvious that having sound financial knowledge is essential for making well-considered decisions, avoiding needless debt, assisting family members in making these difficult decisions, and ensuring one has a sufficient retirement income.

Fundamentals of Personal Finance

Financial literacy translates into personal financial decision-making in personal finance. How do you handle finances? Which investing and savings vehicles do you currently use?

Whether you want to buy a home, support your family, prepare for your kids' college tuition, donate to charities you care about, plan for retirement, or something else entirely, personal finance is about setting and achieving your financial objectives.

It covers banking, budgeting, managing credit and debt, and investing, among other things. To get you going, let's examine these fundamentals.

Overview of Bank Accounts

Usually, the first financial account you start is a bank account. The money you'll need for significant purchases and life events can be saved and grown in bank accounts. Here is some information on bank accounts and why setting up a healthy financial future starts with them.

What Makes a Bank Account Necessary?

6% of American families still lack a bank account, even though most Americans do.

Why is opening a bank account so crucial? Since it's more secure than carrying cash. In the United States, assets housed in banks are often insured by the Federal Deposit Insurance Corporation (FDIC), making them more difficult to steal. This implies that even if every consumer chooses to take out their money at the same moment, you should always be able to retrieve your cash.

Having a bank account is necessary for many financial operations to:

• Make use of a credit or debit card.

• Utilize payment apps such as PayPal or Venmo.

• Make a check.

• Make use of an ATM

• Purchase or lease a house

• Get paid by your employer.

• Get interest on your investment.

Online versus Physical Banks

Most likely, when you think of a bank, you see a structure. We refer to this as a brick-and-mortar bank. You can open accounts and handle your finances online with a lot of physical banks.

Some banks don't have any physical locations; they only operate online. Except for in-person visits, these banks usually provide the same services as traditional banks.

What Kind of Bank Am I Able to Use?

The most prevalent kind of bank where customers have accounts is a retail bank. Retail banks are for-profit businesses that provide credit cards, insurance, loans, and checking and savings accounts. Retail banks may just be accessible online, or they may have actual, accessible buildings. Most provide both choices.

Credit unions: Similar to banks, credit unions offer checking and savings accounts, make loans, and provide other financial services. They are, nevertheless, member-owned non-profit organizations. Credit unions typically provide better interest rates and fewer fees for loans and savings accounts. Although credit unions typically have significantly fewer branches and ATMs, they are occasionally credited with offering more individualized client service.

Which Bank Account Types Am I Able to Open?

The typical person may wish to open one of three primary types of bank accounts:

1. Savings account: A savings account is a bank or other financial institution's interest-bearing deposit account. Although savings accounts usually have low interest rates, they are a wise choice for putting money aside for immediate needs because of their dependability and safety.

There can be legal restrictions on how frequently you can take money out of them. They are perfect for creating an emergency fund, saving for a short-term objective like purchasing a car or taking a vacation, or just keeping extra money in your checking account that you don't need.

2. Checking account: A checking account is a deposit account that enables you to make deposits and withdrawals at a bank or other financial institution. Despite earning little to no interest, checking accounts are relatively liquid, allowing for many withdrawals each month (unlike less liquid savings or investment accounts).

One can deposit money by direct deposit, an ATM, a bank, or another electronic transfer method.

You might be able to locate a fee-free checking account. Some levy monthly fees and other fees (like overdraft fees or using an ATM outside of the network), depending on factors like how much you retain in the account or whether you have an automatic mortgage payment or direct deposit from your salary linked to the account.

Some banks provide second-chance and lifeline accounts, which can be helpful for people who have trouble getting approved for a regular checking account.

3. High-yield savings account: Compared to a regular savings account, a high-yield savings account often offers a significantly greater interest rate. High-yield accounts typically include higher fees, larger minimum balances, and larger initial deposits as a trade-off for getting more interest on your money.

An Emergency Fund: What Is It?

An emergency fund can be any source of money you have saved to help you deal with unforeseen expenses like auto repairs, medical costs, or job losses; it is not limited to any particular kind of bank account. This is how they operate:

The majority of people keep their emergency funds in a different savings account.

Eventually, there should be enough money in the account to meet costs for at least three to six months.

Regular expenses should not be paid using emergency reserve funds.

Overview of Credit Cards

You may be familiar with them as the plastic cards that practically everyone keeps in their wallet. You can borrow money from the credit card issuer and repay it over time with your credit card account.

You will be assessed interest on the amount owed for each month that you fail to make the full repayment. Keep in mind that certain credit cards, also known as charge cards, demand that you settle your balance in full each month. These are less frequent, though.

What Makes Credit and Debit Cards Different?

The distinction is as follows:

Your checking account is immediately debited when you use a debit card. Debit cards do not allow you to borrow money; thus, you are unable to spend more money than you have on hand. Furthermore, you cannot establish a credit history or credit score using a debit card.

The Bottom Line

Given the variety of alternatives available, the complexity of the financial world, the knowledge that must be acquired, and the work required to figure out what suits you best, navigating the personal finance world may be challenging.

Although the subjects included in this article are only the first steps in a financial education, they include the most significant and commonly used goods, resources, and advice for beginners. If you're prepared to learn more, take a look at these other Investopedia resources: