The Four Cornerstones of Financial Literacy was developed as a resource and a guide to help people have better financial well-being. It was written and developed by Darryl Dahlheimer through a federal grant governed by the Minnesota Department of Human Services, Office of Economic Opportunity, and with Minnesota Community Action Partnership.
Having a good knowledge of the basic concepts in finance, such as budgeting, saving, asset creation, etc., will give you the confidence to handle any financial situation.
This article will help you understand the four cornerstones of financial literacy.
The Four Cornerstones Of Financial Literacy
Budgeting to Create Savings
Your income is hard-earned money, so planning how you spend your money is essential. Budgeting is one of the powerful tools that help you plan, organize, and control your money, and it helps you set your financial goals. You must first create a budget that works for you where you plan, prioritize, track and reduce your spending to make savings.
Debt Reduction and Asset Building
Having a debt can be positive and negative, and using your credit intelligently becomes a boon in building assets. The first step is to monitor your Debt-to-Income Ratio (DTR). It is the percentage of monthly income to monthly debts payable. You must maintain the Debt-to-Income Ratio to less than or equal to 50%. The next step is to prioritize your debts (i.e., secured or unsecured loans) and finally repay your debts on time without defaulting.
When you reduce your debts, you can easily increase your assets through your savings left. Moreover, assets show how much wealth you have. Financial assets include savings, real estate, investments, retirement funds, and precious possessions. The only way to build your support is to plan your spending, repay your debts and save the money to build assets.
Building a Good Credit Rating
Your credit report shows your credit rating, which indicates your overall financial status. This report consists of personal information, public records, credit accounts, and the number of inquiries made. There is a high chance of an error occurring in your report when you don’t review it regularly. Therefore, it is best to check your information at least once a year and get your errors rectified from your respective credit bureaus.
Credit score plays a vital role when you avail of a personal loan or home loan to fulfill your sudden financial needs. You must first repay your dues on time, review your report regularly, and avoid multiple hard inquiries to improve your credit score.
Consumer Protection and Financial Institutions
Have a savings or checking account in one of the financial institutions such as credit unions or banks to get benefits. Credit unions offer high-interest rates on your savings, and banks provide a wide range of financial services. But, when you invest your money, you must also be aware of your consumer protection tools. It will also help protect yourself against financial scams, identity theft, predatory lending, etc.
Financial literacy is critical to boosting your confidence in financial matters. It gives you the power to control your money. Knowing how to plan a budget, build your asset, create more savings, and invest to gain profits is a must. Having sound financial knowledge will help you handle any financial crunches smoothly.
It is also essential to be aware of financial scammers who target vulnerable customers. Clearing your past debts and making timely payments is a sure way to improve your financial credibility and credit rating.