Have you created your budget for the upcoming month? Do you have a savings account set up that you’re actively contributing to? Or have you been taking steps to manage your debt, keep your credit score up, and protect your accounts from fraud? All of these money-management steps are what make up the pillars of financial literacy – and what help you create a healthy financial future! So if you’re unfamiliar with what financial literacy is or how you can develop strong financial literacy skills, then let’s dive in to the 5 key components:

What is Financial Literacy?

Financial literacy is your understanding of the basic principles of money management. Having a strong sense of financial literacy means that you are well-equipped with the knowledge needed to understand your financial situation, make smart money choices, build financial security, and reach your long-term goals faster. Not only that but being well-versed in financial literacy can help you avoid missteps such as overspending, incurring high debt, or living paycheck to paycheck. The pay-off? Taking time to learn about the components of financial literacy will both reduce financial stress and set you on the right path toward financial freedom!


First and foremost, to understand your financial situation you need to know how much money is coming in and how much is going out. With a budget, you can map out what costs are most important to you every month, making your spending habits much more predictable and, as a result, keeping yourself from spending recklessly. To start creating a budget, you can follow these simple steps:

  • Calculate your average monthly income and list all your monthly expenses.
  • From here, you can categorize those expenses however you choose, such as dividing them into needs vs. wants.
  • Choose how much of your monthly income you should allocate toward each expense category, keeping in mind that you’ll also want to put some money away in savings – but we’ll get to that in a second . . .

Everyone’s situation is different so be sure to regularly review your spending and revisit your budget every few months to make adjustments as necessary.

Saving & Investing

When budgeting how you’ll spend your paycheck each month, don’t forget to use part of that income to invest in yourself. Whether you’re looking at buying a home, saving up for a car, planning for retirement, or even just building an emergency fund in case of unexpected events, you should take time each month to set some money aside in a savings account. Even starting with a small amount toward savings each month can eventually add up over time and help move you closer to achieving your long-term financial goals. Plus, the account you choose may help your savings grow through interest. Depending on your goal, be sure to research the account options that are available to you and consider meeting with a financial advisor to come up with a comprehensive savings plan.


Another key to developing strong financial literacy skills is to have a strong credit score. With good credit on your side, you can better qualify for a home mortgage or apartment, lower rates on loans, or rewards credit cards. Building and maintaining a high credit score comes down to a few factors:

  • Your payment history
  • Amount Owed
  • Length of credit history
  • Credit mix
  • New credit

To get your credit score to a good place, you’ll want to focus on making any payments you have on-time. In addition, be sure to keep your credit card balances low and try to pay them off in full each month. Experts also recommend avoiding new credit unless it is absolutely necessary in order to create a positive credit history.

Managing Debt

If you are letting debt add up, either from credit cards, student loans, or other high-interest debts, it can cripple your financial foundation. The process of paying off these costs can take anywhere from months to years, so it is important to start tackling it as soon as possible to avoid getting crushed under debt and having it negatively impact your bank account and your credit score. There are two different methods you can use to start the process of paying off debt – the avalanche and snowball method. With the snowball method, you start by first paying off your smallest amount of debt and, once this amount is paid in full, you continue the pattern of gradually paying off your debts in terms of smallest to largest amount. Meanwhile, the avalanche method is the opposite – you start by paying off your largest amount of debt in full before working your way down.

Protect Your Funds

Fraud is still on the rise each year, so it’s no surprise that protecting your finances has become a big part of financial literacy. In order to avoid account hacks, compromised debit or credit cards, and identity theft, be sure that you are taking precautions to keep your finances safe and steady:

  • Regularly review your accounts for suspicious activity
  • Use strong passwords on all your accounts and devices. Take care to avoid saving this information anywhere but a secure password manager.
  • Look for signs that a website is secure before inputting payment information – such as checking for “https” in the URL and looking for the lock icon next to the address bar.
  • Turn on multi-factor authentication to add an extra level of security to your account.
  • Use a VPN whenever you are on public Wi-Fi.
  • Avoid sharing your sensitive personal and financial information with anyone unless you can verify the request and confirm that the requester is a legitimate, trusted source.


Financial literacy is more than just watching your spending and monitoring your bank accounts – it’s about giving you a full understanding of your financial situation so that you can make informed decisions and take the steps necessary toward long-term financial health. By recognizing the 5 basic principles of financial literacy, you’ll be able to put these ideas to use, practice them in your own life, and start building the skills necessary for your finances to thrive!