National Financial Literacy Month is upon us here in the USA. It’s a good time to think about topics such as income, debts, financial planning tools, and your hopes for the future. You’ll see many articles on the definition of literacy, the definition of personal finance, and the definition of personal financial planning.

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Financial literacy is vital to your comfort and well-being, but most people don’t like thinking about it. The concept can sound intimidating, or even pointless, especially if you live paycheck to paycheck. But with our help, including tips from an expert, you should be well on your way to understanding how financial literacy affects your life.

Financial literacy is a rare skill. Few Americans graduate high school understanding how to manage and grow personal wealth. Financial literacy statistics show that:

  • In 2014, just 39% of Americans had a household budget
  • 34% of Americans had credit card debt
  • 15% of Americans, or 30 million individuals, had credit card debt of $2,500 or more
  • 32% of Americans had no household savings at all
  • 73% of Americans wanted professional help to answer personal finance questions

You’ve heard people mention financial literacy, and maybe you’ve skimmed a few blog posts. But if you are like the majority of people, you don’t have a strong handle on your personal finances. Remember, it’s not too late to learn, and there’s no reason for embarrassment if you don’t know what you’re doing when it comes to money.

So, what is financial literacy and why should you care? Let’s find out.

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Why is financial literacy important?

Before going further, it’s important to understand that there is no official definition of financial literacy. Instead, the concept is broad and incorporates a number of ideas.

It is easiest to first break the financial literacy definition into two parts: literacy and personal finance.

  • Literacy: The definition of literacy is, simply, knowledge of a particular subject.
  • Personal Finance: The definition of personal finance is making good financial decisions, budgeting, saving, investing, and planning. By doing so, an individual or family can pay expected household expenses and survive emergencies without financial stress.

Putting these concepts together, we can create a financial literacy definition. In short, a financially literate person is one who has good financial skills and an understanding of financial matters. They are able to take effective action that fulfills their personal and family goals. It can encompass the simple, such as knowing how much you earn and spend each month or how to understand your pay stub to more complex ideas such as investments and mutual funds.

While financial literacy is important, it’s even more useful to have a goal. As you think about your income and budget, try to make sensible decisions that help you reach your long-term goals as well as meet your immediate needs.

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According to experts, there are four key points to understand about financial literacy:

  1. You must understand the difference between an asset and a liability.

You might think of an asset as something you own, like your house, car, or wedding ring. And you’re partly right—if you own those items without debt. But there’s more to it. An asset is something that helps you earn money. Your job, the garage apartment you rent to a tenant, your whole-life insurance policy. If it brings value, it’s an asset.

A liability, on the other hand, takes money out of your pocket. That’s why your home is probably not an asset; if you pay a mortgage, taxes and utilities, and have little or no equity, the property is a liability. Other examples of liabilities are credit card bills, cars, and car loans.

  1. You must understand the difference between cash flow and capital gains.

Don’t be put off by the language. It sounds technical, but the concept is simple.

In this context, cash flow and capital gains are the two ways of investing, or earning, money:

  • Capital gains is a bit like gambling in that you borrow money now to earn money in the future. When you buy a home, in cash or on credit, with the intention of selling it for a profit, you expect to earn money through capital gains.
  • If, on the other hand, you pay cash for a home and expect to earn rental income, the monthly payment from the tenant is cash flow, and the home is a cash flow investment.
  1. Debt and taxes can sometimes be used to increase wealth.

In most circumstances, the financially literate avoid debt. But certain debts are better than others. If you must borrow money, it’s better to have a mortgage on a rental property than to have a credit card balance.

definition of literacyImage Source: Pexels

You could try to purchase a rental unit with cash and then replenish your bank accounts with the monthly payments you receive from your tenants. But, the financially literate person recognizes that debt is sometimes acceptable, especially if it adds to cash flow.

If you borrow money to buy the rental unit, you’ll still have most of the cash on hand. You’ll have equity in the property from the down payment, so the real estate is an asset. And while you pay off the loan to the bank, you have the benefit of any rental income over and above the carrying costs of the property.

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  1. You make your own decisions about money.

If you invest in the stock market, you probably pay someone else to manage your money. That’s fine, because it’s better to have someone who knows what they are doing. But smaller decisions should never be delegated, even to a spouse or trusted relative.

It’s important to know how much money you have, how much money you owe, and how much is going to pay bills each month. Don’t be ashamed if you don’t know–most Americans don’t–but start looking now.

Now that you know the basics, you may wonder where to begin. To celebrate Financial Literacy Month and to help you get a start on your own finances, we spoke with Sarah Poriss, one of America’s foremost debtors’ attorneys and an American Bar Association Top 100 Blogger in 2015. She represents people facing foreclosure and debt collection, and she gave us some great tips for managing personal finances and developing financial literacy.

Sarah’s Top Five Tips for Managing Money:

  1. Keep track of your spending for 30 days. This idea came originally from Elizabeth Warren, and after seeing how valuable the practice was, Attorney Poriss did it for 60 days. She also asked her husband to track his spending for the same period. The results surprised them, and after reviewing the data, they had a much better understanding of their financial health.

As you review the results of your tracking, do not criticize your partner or feel guilty about any of your frivolous purchases. The goal is understanding, not blame. But do make note of unnecessary expenses and start cutting back as much as you can.

Once you understand the overall household spending and income, keep paying attention. You don’t have to keep tracking every penny you spend (though it wouldn’t hurt). It’s okay if one spouse takes the lead with handling finances, but both parties should have a good understanding of the family’s overall financial picture.

Most people don’t plan for death, divorce, or illness, and you never know when you may have to start handling the budget and bills by yourself. If you start now, it will be much easier to take over in the event of an emergency.

  1. Check your credit every year. You can get one report each year from each of the big three credit reporting agencies by visiting Unlike similar companies with lots of fine print, never charges for credit reports. Some banks now offer free reports, too, but always check for hidden costs or obligations.

Once you receive your copy of the credit report, look carefully at each section. Make note of inaccuracies, check for identity theft, and look out for any forgotten line items. If you’re feeling prudent, you can order one report every four months, so you can check for problems three times a year instead of once.

  1. Open all of your mail! Most people put their bills aside and forget about them. Time goes by, and soon they feel overwhelmed and hopeless because they have months of missed payments and fees sitting behind the toaster.

Avoid the stress of late payments by opening all your mail each week. Check account balances, make sure all electronic payments are made on time, and make sure nothing unexpected happens. Don’t forget to also review electronic bills and statements.

Once you get in the habit of doing this once a week, it should take you less than 30 minutes each time. The visual reminder of income and expenses will help you reel in unnecessary expenses and help you make changes that are beneficial to your financial health.

One caveat: if you find problems or discrepancies when you review your mail and online statements, you must take care of the situation immediately. If you try to ignore an issue or put it off, it’s going to get worse. If you wait too long, you may end up in a situation where you need a lawyer to resolve the issue. Even if you decide to wait a week to address any concerns, you run the risk of forgetting, so make sure you look over everything when you have extra time to handle any unexpected tasks. And take comfort each week you don’t find anything unexpected!

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  1. Assume someone else profits when you borrow. There are many financial products available, and even people with terrible credit are bombarded almost daily with offers for credit cards, credit repair, auto loans, and mortgages. But don’t forget these offers come from businesses, not from people who have a borrower’s best interests at heart.

If a company tries to convince you to borrow money, ask yourself why they care. Chances are, they stand to earn a lot in fees and interest from the products they are pushing on you.

Most people borrow money at some point, and some loans are better than others. If you are going to make a large purchase, check your credit first. You may be surprised to find your credit is better than you think, and you may qualify for a much better loan than you expected.

  1. Open a savings account. Start saving for the future today. Once you open your savings account, have a small percentage, even just 5% or 10%, of each paycheck deposited automatically into the account; do the same with all other income such as bonuses and your tax return. And once the money goes in, don’t touch it. It’s there for retirement and true emergencies.

Financial Literacy Month may not be an exciting event, but it highlights issues that impact your life more than almost anything else. True financial literacy takes years to develop, but that doesn’t mean it’s too late to start.

Look at the financial literacy definitions and tips we have given you, and try to break your situation down into manageable components. Even if you only start opening your mail or tracking how much you spend on coffee at work, you’ll be ahead of where you are right now.

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