The Basics of Financial Literacy: Money Skills to Know

There’s plenty to learn about personal financial topics, but breaking them down can help simplify things. The basics of financial literacy start with everyday skills that can help you manage your money today while preparing for what comes next.

What is Financial Literacy?

Financial literacy is simply understanding how money works and how your everyday choices can affect your financial well-being. It includes skills like managing a budget, building savings, using credit responsibly, understanding your bank accounts, and planning for future goals.

You don’t need to know everything about money to be financially confident. What matters is having a good foundation, knowing what questions to ask, and continuing to learn as your life changes. Whether you’re opening your first checking account, saving for a home, paying down debt, or thinking about retirement, a little financial education can help you make decisions that feel right for you.

1. Understand Your Income, Expenses, and Budget

A good place to start with financial literacy is understanding how money moves through your life. That means knowing how much money you have coming in, where it goes each month, and what you have left to save or put toward other goals.

Start with your income, or the money you bring home from work, a business, or other sources. Then look at where that money goes. Your expenses will generally fall into a few groups:

• Fixed expenses: Costs that usually stay the same each month, such as rent, a mortgage, or a car payment.
• Changing expenses: Costs that may go up or down, such as groceries, gas, utilities, and entertainment.
• Needs: Things you rely on for everyday life, such as housing, food, transportation, and basic utilities.
• Wants: Things you enjoy but may have more flexibility around, such as dining out, subscriptions, hobbies, or entertainment.

Once you understand what’s coming in and going out, a budget can help you put it all together. Think of a budget as a simple plan for your money, not a set of strict rules. It can help you decide what needs to be paid first, how much you can save, and where you may want to adjust your spending.

Financial Tip:

You don’t need a perfect budget to get started. Review your recent spending and look for patterns. Knowing where your money is going is a meaningful first step toward deciding where you want it to go.

2. Learn the Banking Basics

Bank accounts are part of everyday life but understanding how they work can help you get more from them and avoid unnecessary surprises. There’s plenty to learn about banking, but breaking things down can help simplify them. Start with a few basic banking principles:

• Checking account: An account designed for everyday spending and payments. You might use it to receive direct deposits, pay bills, make purchases with a debit card, or withdraw cash.
• Savings account: An account that helps you keep money separate from everyday spending while working toward an emergency fund or other savings goals.
• Debit card: A card connected to your checking account. When you use it, money generally comes directly from your account, so keeping track of your balance is important.
• Account balance: The amount of money in your account. Checking your balance regularly can help you know what’s available to spend and spot transactions you don’t recognize.
• Account fees: Depending on the account, certain activities may come with fees. Knowing how your account works and reviewing its terms can help you understand when fees may apply.

Digital and mobile banking can also make managing your accounts easier. You can regularly review transactions, keep an eye on balances, set up alerts, pay bills, and move money between accounts. Automatic transfers can be especially helpful when you’re building savings because they allow you to set money aside without having to remember each time.

3. Understanding Interest, Credit, and Debt

Understanding the ways credit and debt work for and against you are some of the first steps toward understanding personal finance. While it’s not useful to fear credit and debt and avoid it entirely, there are some things to look out for.

Debt is like any tool. When used correctly, it can be useful. When used incorrectly, debt can easily spiral out of control. Before borrowing, take time to understand a few basics:

• Credit: Your ability to borrow money with the agreement that you’ll repay it. How you manage credit over time can affect your ability to borrow in the future.
• Credit score: Your credit score is one of the factors lenders use to judge your qualification for mortgages, auto loans, and other lending. Your payment history, amount of debt, and other factors can affect your score.
• Interest rate: Interest is part of the cost of borrowing money. A higher interest rate generally means you’ll pay more over the life of a loan, so it’s important to look beyond the monthly payment when considering a loan.
• Loan repayment: Making your payments on time helps you stay on track with your debt and can help protect your credit. Missing payments may negatively affect your credit score, and that can take time to recover from.

Not all debt affects your finances in the same way. A loan with payments that comfortably fit within your budget may help you reach an important goal. But when monthly debt payments make it difficult to cover everyday expenses, save for emergencies, or keep up with other bills, it may be a sign that your budget is becoming stretched.

Interest can work against you, but it can work for you, too. When you borrow money, interest adds to what you have to repay. When you save or invest in an interest-earning account, interest may help your money grow. Understanding which side of interest, you’re on can help you make more informed financial decisions.

4. Build Savings for the Expected and Unexpected

It’s never too early to start saving. In fact, the earlier you start, the better your result. Your savings can help cover an unexpected car repair or medical bill while also helping you work toward goals like a vacation, a down payment on a home, or retirement.

It can help you to think about savings in a few different ways:

• Emergency savings: Money set aside for unexpected expenses, such as a home repair, medical bill, or loss of income.
• Short-term savings: Money for goals you hope to reach sooner, such as a trip, new appliance, or vehicle.
• Long-term savings: Money you’re building for goals further down the road, such as buying a home or preparing for retirement.

Time matters, too. The earlier you start saving, the more time your money has to grow. One reason is compound interest. Compounding is when you earn interest on your interest. As interest is added to your balance, future interest can be calculated on a larger amount.

Cindy vs. Charlie: Consider the case of Cindy and Charlie, who will each invest a total of $100,000. Cindy starts right away, depositing $10,000 a year at a hypothetical 6% rate of return. After 10 years, Cindy stops making deposits. Charlie, on the other hand, waits 10 years before starting to invest. He also puts $10,000 a year away for 10 years, at the same hypothetical rate as Cindy. After 20 years, who has more money? Shockingly, Cindy’s balance is nearly twice as big as Charlie’s, thanks to the extra time her investment returns had to compound.¹

That extra time can make a big difference in how much she has accumulated by retirement. The example shows why starting earlier can be valuable, even when you’re only able to start with a manageable amount.

5. How Inflation Affects Your Money

Infltion has the potential to eat away the purchasing power of your money. That means, with inflation, the dollar you earn today may not be worth a dollar in the future. Here are some things to keep in mind when thinking about inflation.

Cash in a Mattress: Keeping all your cash under a mattress is not only unsafe, but it also literally costs you money. Assuming the rate of inflation is a hypothetical 2%, every dollar you squirrel away will shrink in value to just $.98 next year.

Rate of Return: Because inflation erodes the purchasing power of your money, any returns you earn on your accounts may not be the “real” rate of return. If your account earned a hypothetical 6% rate of return over the last year, but inflation was 1.5%, your real rate of return was 4.5%.²

Understanding inflation can help you think differently about long-term financial goals. It’s not only about how much you save. It’s also important to consider what that money may be able to buy when you need it.

6. Protect Your Money and Personal Information

Managing your money also means knowing how to protect it. Identity theft and financial fraud can have lasting effects on your current and future finances, so a few everyday security habits are an important part of financial literacy.

Here are a few ways to help protect yourself:

• Use strong, unique passwords: Use a different password for each site and service. Consider using a password manager to create and securely store strong passwords. Learn how to create a strong username and password.
• Keep an eye on your accounts: Review your bank and credit card transactions regularly. If something doesn’t look right, investigate it and contact your financial institution when needed.
• Be careful with personal information: Think twice before sharing information like your Social Security number, account information, passwords, or verification codes, especially when a request is unexpected.
• Watch for suspicious messages: Be cautious with unexpected emails, texts, or calls asking you to click a link, send money, or provide personal information.

Small security habits can go a long way toward protecting the money and financial progress you’ve worked hard to build.

Check out additional Security Tips.

Keep Building Your Financial Confidence

Improving your financial literacy doesn’t happen all at once. Understanding the basics, building good money habits, and continuing to ask questions can help you make more informed decisions as your life and financial goals change. Whether you’re budgeting, saving, managing debt, or planning, every step you take can help build greater financial confidence.

Have questions or are you ready to take your next step? Connect with your local Forward Bank team for guidance that fits your financial goals.