6 Ways to Improve Your Financial Literacy

In researching finances, debt, or money management, you might come across the term financial literacy. That means possessing the knowledge you need about financial subjects so you can make smart decisions about managing your money.

If you aim to improve your finances, then financial literacy is part of that journey. The higher your financial literacy, the more likely you are to create a better financial future. If you become more financially literate, you can also better identify the best debt relief options that fit your situation and help you improve your situation over the long haul. 

What Does It Mean to Be Financially Literate?

What are the concepts you should learn to improve your financial literacy? These skills range from understanding how a checking account is different from a savings account to knowing how a credit score works. 

Financial literacy can be broken down into five major categories:

• Banking: Bank fees, debit cards, savings accounts, checking accounts, and money market accounts.

• Budgeting: Monthly income and expenses, allocating your money, and planning for future goals.

• Saving: Emergency funds, saving for long-term and short-term goals, and the ways interest rates affect your savings.

• Debt: Debt-to-income ratio, good debt vs bad debt, repayment terms, debt solutions (such as debt settlement), and forbearance.

• Investing: Retirement and brokerage accounts, tax implications associated with different investments, and how to build a portfolio that matches your investing timeline.

Financially literate individuals work on learning about each of these categories and the concepts that fall within each—and they aren’t afraid to ask for help. Whether that financial help comes from someone they know, such as a teacher or parent, or from financial experts, they take the time to ask questions, listen to the answers, and act.

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6 Ways to Improve Your Financial Literacy

If you're ready to take the next step towards improving your financial literacy, here are six key steps to take.

1. Read financial books

Adding some financial books to your reading list is a quick and easy way to improve your financial literacy. Look for books that teach you about budgeting, debt, investing, and saving. You can even expand into niche personal finance books about topics such as real estate investing or financial independence.

It’s true that the more you read and apply that knowledge, the more successful you become. There’s a reason the well-known billionaire investor Warren Buffett spends so much time reading. If you aren’t much of a bookworm, try audio books. The important thing is to find a topic within finance that interests you, and start learning.

2. Listen to podcasts or watch videos by financial experts

Many financial experts share advice through podcasts and videos—including prominent financial advisors like Dave Ramsey, Ramit Sethi, and Suze Orman. There's a reason these financial gurus have large audiences—their advice is relatable and easy to follow. 

Orman, Ramsey, and Sethi answer questions from callers and provide practical advice on real-world situations. Listening to these experts may help you overcome your own financial struggles and improve your situation. 

3. Use credit well

Source: FINRA Investor Education Foundation, The State of U.S. Financial Capability: The 2018 National Financial Capability Study

If you want to use credit well, you'll need to develop two habits: Spend less than you earn and pay off your credit card in full each month. If the end of the month leaves you with a larger balance than you expected, try making payments throughout the month instead. There’s no reason you can’t pay your credit card weekly to stay on top of expenses and avoid bill shock.

Here's one way to manage your credit: When you want to purchase something using your credit card, look at your checking account balance first. Do you have enough in your checking account to cover the balance? If yes, using your credit card makes more sense. If not, wait until you have the money readily available so you won’t accrue credit card debt.

If you have a balance, now is a great time to come up with a plan to get rid of it.

3. Budget regularly

A financially literate person knows the value of budgeting. A budget is a roadmap for your money. Think of it not as a limit, but rather as a guide for how and when to spend. 

A budget shows you exactly what you spend the most money on, helping you make smart choices about where you want your dollars to go. If you’ve never budgeted before, it’s a great way to improve your financial literacy.

Start by doing an audit of your income and expenses from the last month. This can be as simple as creating a two-column sheet with one column for income and one column for expenses. Look through your bank statement and credit card account(s) and write down everything you spent, and all the money you earned.

Next, categorize your expenses into buckets. You can use a simple strategy called the 4 Fs method. This method breaks down your expenses into four major categories: fixed, fun, fudge, and future.

• Fixed: Necessary and consistent expenses or bills that you pay each month, like rent or mortgage, utilities, debt payments, groceries, internet and cell phone bills, insurance and taxes.

• Fun: Expenses that aren't strictly necessary, such as restaurants, shopping, clothing, gifts, or subscriptions.

• Fudge: Any miscellaneous expenses not otherwise accounted for.

• Future: Money set aside for savings goals like vacations, a car, a house, or retirement.

After you categorize your expenses, you can quickly identify which category you spend the most money on. You can also look for areas where you might reduce spending to free up cash for debt reduction or savings. You can use the audit to help you budget for the following month more realistically. 

Once you track your income and expenses for a few months, you should have a much clearer picture of your budget. Many people fine-tune their budget continuously, especially while trying to cut expenses and pay down debt. 

4. Understand your 401(k)

Many working Americans have a 401(k) retirement plan. These employer-sponsored retirement plans are popular because they allow you to set aside pre-tax money from each paycheck to put into your retirement account. 

However, it’s not always easy to understand how 401(k) plans work. In fact, a recent Principal Financial Group study found that 60% of employees who weren't participating in their 401(k) actually thought they were.

Not understanding how this investment vehicle works could have negative consequences, especially if you borrow from your 401(k), or don’t take advantage of a company match. 

Here are a few questions about 401(k) accounts worth knowing the answers to:

• Does my company offer 401(k) matching? If so, how much is it?

• What type of investments am I making in my 401(k), and do they align with my investment goals? 

• What types of expenses are associated with my 401(k)?

• How much do I need to set aside from each paycheck in order to reach my retirement goal?

Contact your human resources department or the vendor who handles your 401(k) to get the specifics about your plan. Then do your research or consult with a financial advisor or other financial expert who can give you pointers on how to maximize your retirement savings.

5. Understand how credit scores work

A credit score is a tool that helps you gain access to different types of loans and credit. Understanding how they work is part of a core financial literacy foundation. Here are four steps you can take to learn more about your credit score.

• Learn the details of how a credit score is calculated. Typically, scores are based on payment history, amounts owed, length of credit history, mix of different types of credit accounts, and recent inquiries.

• Get a copy of your credit report. You can get a free copy of your report from each of the major credit reporting agencies (Equifax, TransUnion, and Experian) by visiting Annual Credit Report. Note that a credit report is different from a credit score.

• Make sure your information is correct and current. If there are errors, you can dispute them with the credit bureaus. You should request correction of any errors you find because sometimes errors can affect your score.

• Review your credit scores. You can obtain a credit score for free using free credit score websites online.

If you get to a screen that asks for payment, click away and start over. You don’t have to pay for your credit reports or credit scores.

Why Work On Financial Literacy?

You’ve achieved financial literacy when you’ve acquired skills and education around financial concepts, equipping yourself to make informed financial decisions. That can help you become more financially secure and more confident in your money management. 

Financial literacy can take a long time to fully master, and it’s important to stay on top of changes in how money, investments, banking, and the economy function. Like many things, financial literacy requires ongoing learning as the economy changes, laws evolve, and your life circumstances change.

Many of us know that we should spend time understanding our finances, and when we put it off, it can cause anxiety and stress. In fact, a 2024 Bankrate survey found that 47% of Americans said money worries were having a negative impact on their mental health. Worried Americans reported difficulty sleeping, anxiety, stress, worrisome thoughts, and even depression about their finances.

Financial literacy can help eliminate these mental health concerns by giving you skills that set you up for more money wins. If you are financially literate, you can make decisions about managing your money more easily, because you understand the concepts that control your financial success.

Financial Literacy Starts with Action

If you want to improve your financial literacy because you’re struggling with existing debt, we can help. Learning about your debt options is a great way to start taking ownership of your money, grow your financial literacy, and move toward the financial future you want.