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Financial Literacy: Basics of Personal Finance and Budget Management

June 26, 2024

Financial Literacy: Basics of Personal Finance and Budget Management

Ariel Gottfeld

Ariel Gottfeld

Financial literacy is crucial to everyone who works, owns a business or enters adulthood, but only 57% of adults in the United States are financially literate. You'll find some surveys showing this rate as low as 43%.


A lot of schools do not teach students how to be financially literate. If you’re one of the people who feels like they don’t know enough about finances, we’re going to walk you through the process step by step in our guide.

Why Financial Literacy Matters

Ignoring financial literacy is one of the worst mistakes that you can make because poor decisions can lead to:

  • Mounting debt
  • Failing to meet financial goals
  • Not having enough money for retirement
  • Difficulty dealing with emergencies

For example, you may have to wait 5 or 10 more years to buy a home because you didn’t manage your finances. You can also take on more debt to cover emergencies, such as fixing your car, water heater, roof or even a root canal.

Debt that isn’t paid off quickly will lead to prolonged financial hardships and cause you to pay significant interest in the process.

Creating a Personal Budget

Finances start with creating a personal budget. Your financial planning must start with a firm understanding of:

  • Income coming in
  • Money going out

You can do this by logging all of your expenses, which is difficult if you make a lot of cash transactions.

We encourage you to do the following right now:

  • Create a spreadsheet for your expenses
  • Add credit card minimum payments
  • Add rent or mortgage payments
  • Add food costs
  • Add gas costs
  • Add insurance costs
  • Add in utilities
  • Add any other expenses you have each money

You'll consider these “must-have” expenses. Feel free to add in non-necessary expenses, such as fast food, entertainment, etc.

Add to your list throughout the month to see where all of the money you earn is going. Often, people are shocked when they learn how those small $2 - 10 transactions add up over the month.

You’ll want to do the same with your spreadsheet for income.

One you have a firm understanding of your income and expenses, it makes it much easier to create a budget. You need to stay within your income range. For example, you may decide that you want to:

  • Spend $600 on food
  • Spend $50 on eating out
  • Save 10% of your income
  • Etc.

Your budget should allow you to pay off all of your life expenses while also meeting your saving and investing goals. If you’re not earning enough to invest or save, that’s also acceptable.

What you may need to do is cut back on unnecessary expenses or find a way to add to your income each month.

A basic budget will help immensely with your goal of becoming financially literate. Once you have a budget, we suggest moving into savings and investing.

Saving and Investing Wisely

Budgeting tips often forget about saving and investing. You should have long-term and short-term savings goals. Investors will recommend so many different strategies here, such as:

  • 50% to needs
  • 30% to wants
  • 20% to savings/investing

How should you invest? That will change depending on your age and the country you reside in. A mix of low-risk and high-risk investments is a good idea.

For example, for low-risk investments, you may put money into CDs, savings accounts and bonds.

High-risk investments are often long-term options, such as investing in stocks or mutual funds.

If you can afford to invest, do it. You want to do everything that you can to make your money start working for you, and the only way to achieve this goal is through investing.

Managing Debt and Credit

Financial education should begin with debt and credit. For example, if you have a credit card with 29% interest and have $3,000 on it, you’ll need to pay $100 a month to pay it off in 55 months.

In total, your $3,000 debt will cost you $2,406 extra in interest.

Often, your credit card interest will be much higher than you’ll ever make in investments. Create a plan to pay off your debt as quickly as possible, starting with your high-interest debt.


It's better to pay off high interest debt than it is to invest because the interest is so much higher.

Financial Goals and Planning

Financial literacy must also include your goals and planning. You should:

  • Create goals
  • Create milestones required to reach your goals
  • Set durations to meet your goals

Your goals are unique to you, so it’s important that you know what it is that you’re working so hard to achieve.

Emergency Funds and Safety Nets

The basics of finance or basic financial literacy should include creating an emergency fund and having a safety net.


What can go wrong will go wrong.

We recommend that you build up your emergency fund before you begin investing. You should have enough in your emergency fund to cover 3 – 6 months of your total expenses.

So, if you need $2,000 a month to live and pay your bills, you’ll need $6,000 to $12,000 in your emergency fund.

Investment Options for Beginners

The importance of financial literacy cannot be overlooked, especially if you want to start investing. If you’re new to investing, consider the following options:

  • High-yield savings accounts: These accounts can often be opened through online banks, and they offer higher interest than standard savings accounts. They’re a great option for parking your money or even holding your emergency fund.
  • Certificates of deposit (CDs): CDs are another option to earn interest on your savings, but they will tie up your money for a certain period of time (6 months, 1 year, 5 years, etc.).
  • 401(k) or another retirement plan option: The simplest way to get into investing is a retirement account. A 401(k) account will grow tax-free until you reach retirement age.
  • Mutual funds: These allow you to invest in a basket of bonds, stocks or other assets.

These investment options are less complex and can help you start building a portfolio.

Setting SMART Financial Goals

When you set SMART financial goals, you set yourself up for success. But what exactly are SMART goals?

They are goals that are:

  • Specific: What do you want to do with your money? Do you want to save for an emergency fund, invest in your retirement accounts, pay off debt or do something else? Be specific about your goals for your finances.
  • Measurable: How much do you want to save, invest or pay off? Set a specific number for your goal to make it measurable.
  • Achievable: Is your goal realistically attainable, or are you aiming too high?
  • Relevant: Is this goal important to you? Why? You must have a purpose if you want to achieve your goal.
  • Timely: When will you accomplish this goal? Be specific about your timeline (e.g., one year, five years, etc.).

SMART goals will serve you well when you’re engaging in financial planning, setting a budget or working to pay off your debt. Why? Because they give you purpose and a direction to follow.


Improving your financial literacy will help you make smarter decisions with your money. Use this guide to learn how to better manage your credit and debt and set financial goals for your future.

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