Financial literacy simply means understanding how money works. That includes earning it, using it wisely, saving it, and finding ways to make it grow. You don’t need to be a finance nerd or a Wall Street expert to get started. You just need the right information and a little guidance.
We’ve put together this beginner’s guide to walk you through the basics of financial literacy, from budgeting and saving to managing debt and investing.
What Is Financial Literacy?
Financial literacy is the knowledge and confidence to make smart decisions with your money. It’s knowing how to budget, save, spend, manage debt, and plan for the future. It’s not about being rich or having a finance degree; it’s about having the tools to make your money work for you, no matter how much you earn.
When you’re financially literate, you understand the basics of how money moves in your life. You know how to track what’s coming in and going out, how to avoid common financial pitfalls, and how to set goals that move you forward.
Why does this matter? Without financial literacy, it’s easy to fall into cycles of debt, overspending, or missed opportunities. But when you know the basics, you’re more likely to build savings, reduce stress, and feel in control of your financial future.
Part I. Budgeting
Budgeting is giving your money a purpose. It’s about allocating money to what matters to you. Your budget is your roadmap to financial freedom. Many financially successful individuals, including millionaires, attribute their wealth to disciplined budgeting and spending habits.
Common Budgeting Methods
The best budgeting method is the one that helps you stay consistent and achieve your goals. Here are a few of the most popular ways to budget:
1. 50/30/20 Rule
The 50/30/20 Rule is a simple and popular method, especially for beginners. It divides your after-tax income into three categories:
- 50% for needs
- 30% for wants
- 20% for savings and debt repayment
It’s easy to follow and gives you a balanced framework without getting too detailed. If you want a straightforward way to start budgeting without tracking every dollar, this is a great place to begin.
2. Zero-Based Budgeting
Zero-based budgeting requires you to give every dollar a job. At the end of each month, your income minus your expenses (including savings) should equal zero. This doesn’t mean you spend every dollar; it means you plan for every dollar, including what you’ll save.
It’s a bit more hands-on, but it works well for people who like control and want to know exactly where their money is going. Apps like YNAB (You Need A Budget) and Every Dollar are designed around this method.
3. Envelope System
The envelope system is a cash-based budgeting method where you physically divide your money into envelopes labeled by category, like groceries, gas, or dining out. Once the envelope is empty, you stop spending in that category for the month.
While this method may seem old school, it’s incredibly effective if you struggle with overspending or want to build better awareness around your habits. There are also digital versions of envelope budgeting available through apps like Goodbudget.
4. Pay-Yourself-First Budget
The pay-yourself-first method flips the usual budget on its head. Instead of saving what’s left over after spending, you save first, then budget the rest. This method is especially useful if your goal is to build savings or pay down debt quickly.
Set up an automatic transfer to your savings account or retirement fund as soon as your paycheck hits, and you’ll never miss the money.
How to Create a Budget in 7 Easy Steps
Budgeting gives you clarity over your finances. Here’s how to create a budget that works.
1. Know your net income.
Start with what you bring home after taxes and deductions. This is the number you’ll base your budget on.
2. Track your spending.
Log every dollar you spend. Apps, spreadsheets, or even a notebook work. A good rule of thumb is to track at least 3 months of your expenses to see where your money is going. Most people are surprised to learn how much they spend on things like food delivery or streaming subscriptions.
3. Sort your expenses.
Sort your expenses into categories like:
- Fixed: Rent, loans, insurance
- Variable: groceries, gas, utilities
- Discretionary: Eating out, shopping
- Savings/Debt payments
Get our FREE Personal Budget Categories List.
4. Pick a budgeting method.
Use what fits your lifestyle: 50/30/20, zero-based, or pay-yourself-first. There’s no perfect method. Just choose what helps you stay consistent.
6. Allocate your money.
Assign dollar amounts to each category based on your priorities and goals. If your budget is tight, cover the essentials first: food, utilities, shelter, and transportation. You may need to get a second job or a side hustle to cover other expenses.
7. Check in and adjust.
Review your budget weekly or monthly. Track your expenses diligently. Remember, you can’t manage what you do not know.
Part II. Saving
A solid savings habit is one of the biggest indicators of financial success. You don’t need a high income to build wealth; you need a good savings rate. A person making $40,000 and saving 20% is building wealth faster than someone making $100,000 but saving nothing. It’s not what you earn, it’s what you keep that counts.
If you haven’t started saving, you need to prioritize building your emergency fund. It’s your financial safety net. Your emergency fund covers unexpected costs like medical bills, car repairs, or job loss, so you don’t have to rely on credit cards.
Aim for at least $1,000 to start. While a thousand dollars doesn’t seem much, you’ll be surprised to know that many Americans can’t afford a $1,000 emergency expense. The main idea here is to start small with $1,000, then build toward 3–6 months of living expenses.
Types of Savings Accounts and When to Use Them
Different savings goals call for different places to park your money. Here are the most common types:
1. Basic Savings Account
Good for short-term savings and a place to park emergency cash. It’s easy to access, but usually offers low interest. Use it to separate savings from spending and avoid accidentally dipping into your funds.
2. High-Yield Savings Account
Ideal for growing your emergency fund or saving for big goals. These online accounts pay much higher interest than traditional savings. Just make sure there are no monthly fees or high minimums.
3. Money Market Account
Best for those who want a bit more interest and check-writing access. You’ll need a higher balance to avoid fees, so it works well if you already have a few thousand saved.
4. Certificates of Deposit (CDs)
Useful for saving money you don’t need right away. In exchange for locking in your cash for a set term, you get a guaranteed interest rate. Choose this for medium-term goals like a car or tuition.
5. Digital Buckets or Envelopes
Great for organizing savings by goal. Many banks let you split one savings account into labeled “buckets” (vacation, gifts, etc.). It’s visual, simple, and helps you stay on track.
How to Save More Money Regardless of Your Income
1. Set clear savings goals.
It’s easier to save when you know what you’re saving for. Instead of saying “I need to save more,” define the goal with “I want to save $1,000 for emergencies in 3 months” or “I need $500 for holiday gifts by December.” Here are more examples of SMART savings goals:
- Save $1,000 for emergencies in 3 months.
- Pay off a car loan balance of $4,800 within 18 months.
- Contribute $200/month to a Roth IRA.
2. Automate your savings.
Set up automatic transfers right after payday. When saving happens in the background, you don’t have to think about it or talk yourself out of it. Even $25 a week adds up quickly when it’s on autopilot.
3. Pay yourself first.
Treat savings like a bill. Move money into savings before you spend on anything else. This shift in mindset helps you prioritize your future without relying on leftovers.
4. Trim low-value spending.
Cut back on the things that don’t matter much to you, like unused subscriptions, daily takeout, and impulse buys. Redirect that money to savings. You don’t have to sacrifice what you love, just what you don’t need.
5. Try no-spend challenges.
Challenge yourself to go a few days or weeks without spending in one area, like shopping or dining out. It builds discipline and shows you what’s truly necessary.
6. Stay motivated with visuals.
Rename your savings account (“Rainy Day Fund” or “Hawaii 2026”) or use a tracker to see your progress grow. Visual cues help you stay focused and excited.
7. Boost your income if possible.
You can only cut back so much, but there’s no limit to how much you can earn. If cutting back isn’t enough, explore ways to earn more. Sell unused items, take a freelance gig, or pick up extra hours. Even a small income bump can make a big difference when directed toward savings.
Part III. Managing Debt
Debt is money you borrow and promise to repay, usually with interest. That interest is how lenders make a profit, and it’s why carrying a balance over time can cost you a lot more than you originally borrowed. While we don’t provide debt management services, we do include a debt review as part of our financial analysis.
Credit is your ability to borrow money based on trust that you’ll pay it back. Your credit score reflects how well you’ve handled debt in the past, and it can impact everything from loan approvals to interest rates to apartment applications.
Good Debt vs. Bad Debt
Not all debt is bad. Some debt can help you move forward financially, though you must manage it carefully.
Good debt is borrowed money that helps you build long-term value or increase your income. It’s usually tied to an investment in your future, like education, property, or a business. This type of debt tends to have lower interest rates and can provide a return over time.
Some examples of good debt:
- Student loans for education or job training
- A mortgage to buy a home
- Small business loans to start or grow a company
- Auto loans (when the vehicle is essential and within budget)
Bad debt is borrowing for things that lose value quickly or don’t improve your financial situation. It often comes with high interest rates and can lead to a cycle of owing more than you can manage, especially if used to fund a lifestyle you can’t afford.
Some examples of bad debt:
- Credit card debt from everyday or non-essential spending
- Payday loans or cash advances with high interest
- Personal loans used for luxury items or vacations
- Buy-now-pay-later purchases that aren’t in your budget
How to Pay Off Debt: Debt Avalanche vs. Debt Snowball Method
Two of the most popular methods for paying debt are the debt avalanche and debt snowball. Both work. The best one is the one you’ll stick with.
Debt Avalanche
With the avalanche method, you focus on paying off the debt with the highest interest rate first, while making minimum payments on the rest. This approach saves you the most money in the long run because it cuts down on how much interest you pay overall.
- Best for: Saving money on interest
- Strategy: Pay extra toward high-interest debt (like a credit card at 25%), then move to the next highest
- Downside: It may take longer to feel like you’re making progress if your highest-interest debt also has a large balance
Debt avalanche example:
- Credit Card A – $1,200 at 22%
- Credit Card B – $800 at 18%
- Personal Loan – $5,000 at 10%
- Car Loan – $10,000 at 4%
You’d pay extra toward Credit Card A first while making minimum payments on the rest. Once that’s paid off, you’d tackle Credit Card B, and so on.
Debt Snowball
The snowball method focuses on paying off the smallest debt first, regardless of interest rate. Once that’s gone, you roll the amount you were paying into the next smallest debt. It’s all about quick wins and building momentum.
- Best for: Motivation and quick psychological wins
- Strategy: Pay extra toward your smallest debt (like a $400 credit card), while keeping up with the others
- Downside: You may pay more in interest over time compared to the avalanche method
Debt snowball example:
- Credit Card B – $800
- Credit Card A – $1,200
- Personal Loan – $5,000
- Car Loan – $10,000
You’d pay extra toward Credit Card B first. After that’s gone, you’d roll that payment into Credit Card A, then the Personal Loan, and so on.
If you’re more motivated by progress you can see and feel quickly, start with the snowball. If your focus is saving the most money, go with the avalanche. Either way, you’re moving forward, and that’s what matters.
Practical Strategies to Avoid Bad Debt
Avoiding debt isn’t about never borrowing; it’s about borrowing with a plan and under your budget. Here are excellent ways to avoid bad debt:
1. Spend less than you earn.
It sounds simple, but this is the foundation. If you consistently spend more than your income, debt will fill the gap and it adds up fast. Track your spending and stick to a budget that fits your lifestyle.
2. Use credit cards carefully.
Only charge what you can afford to pay off in full each month. Credit cards are useful tools, but if you carry a balance, you’re likely paying double-digit interest on everyday purchases.
3. Build an emergency fund.
Unexpected expenses are one of the biggest triggers for bad debt. A $500–$1,000 emergency fund can keep you from putting car repairs or medical bills on a high-interest credit card.
4. Avoid impulse purchases.
Set a 48-hour rule before any non-essential purchase over $100. Most impulse spending fades with time. If it’s not in your budget or you didn’t plan for it, it can wait.
5. Don’t borrow for wants.
Vacations, furniture, clothes, and electronics lose value fast. If you have to borrow for them, it’s a sign you should wait or find a different option.
6. Know your interest rates.
Always understand what borrowing will cost you. Compare rates, fees, and terms before you take on a new loan or credit card. A lower rate can save you hundreds or thousands.
7. Limit buy now, pay later (BNPL) use.
BNPL plans are easy to abuse. One turns into five, and suddenly you’re juggling payments across multiple purchases. If you can’t pay for it in full now, reconsider the purchase.
8. Make savings a habit.
When saving becomes part of your routine, you’re less likely to rely on debt when things get tight. Even small, consistent contributions make a difference.
Part IV. Investing
You can’t save your way to long-term wealth, not when inflation slowly chips away at your cash sitting in a bank account. When you invest, you’re putting your money into something that has the potential to increase in value, like stocks, real estate, or index funds. Over time, thanks to compound growth, your money earns money, and that money earns more money. That’s how wealth is built, not overnight, but steadily.
Types of Investments for Beginners
Investing isn’t about picking the “perfect” stock; it’s about choosing a long-term strategy that fits your goals and risk tolerance. That’s why our firm follows a passive investment philosophy vs. active, guided by the S&P 500 and similar trends and benchmarks, rather than trying to ‘beat the market’.
Here are beginner-friendly investments to start today:
Stocks
Buying stock means owning a small piece of a company. If that company grows, your stock’s value goes up. If it struggles, your stock loses value. Stocks have the highest growth potential, but also the most day-to-day volatility.
If you’re trying to save for something in the next 1–2 years (like a car or rent deposit), or if you don’t yet have an emergency fund, stocks may not be the right move just yet. In those cases, a high-yield savings account or CD is safer.
Bonds
Bonds are loans you give to a company or government. In return, they pay you regular interest and return your money when the bond matures. They’re more stable than stocks and don’t swing as much with the market.
Bonds are best for balancing out risk, especially as you near major financial goals (like buying a house or retiring). Consider a mix of stocks and bonds for a smoother ride.
Index Funds
Good old index funds invest in a broad group of companies to mimic the performance of an entire market, like the S&P 500. Instead of betting on one company, you’re spreading your money across hundreds.
Index funds are low-cost, low-maintenance, and historically outperform most actively managed funds over the long term. For beginners, it’s one of the easiest and safest ways to start investing.
ETFs (Exchange-Traded Funds)
ETFs work like index funds but trade on stock exchanges like individual stocks. You can buy or sell them anytime the market is open, and many ETFs are built to track an index or a specific sector (like tech or clean energy).
Look for ETFs with low expense ratios (under 0.10% is great). Use them to start building a diversified portfolio with just one or two purchases.
Mutual Funds
Mutual funds also bundle investments, but they’re usually actively managed, which means someone is picking the investments for you. They’re often found in 401(k)s and IRAs. Pay attention to fees. Look for mutual funds with low expense ratios unless you’re getting personalized management or a unique advantage.
Retirement Accounts (401(k), IRA, Roth IRA)
These are not investments themselves; they’re baskets you put investments into, with tax advantages. A 401(k) is offered through your job, often with employer matching (free money!). IRAs and Roth IRAs are accounts you open on your own.
Always take advantage of 401(k) matching if your employer offers it; it’s a guaranteed return. For long-term tax-free growth, consider a Roth IRA. Automate contributions to make saving consistent and stress-free.
Get Expert Financial Advice from Us.
Financial literacy doesn’t have to be daunting. With us, you get expert guidance and personalized financial solutions.
At Griffiths, Dreher & Evans, PS, CPAs, we help you build and protect your wealth more effectively. All business valuations are performed and certified by one of our CPAs who hold either the Accredited in Business Valuation (ABV) or Certified Valuation Analyst (CVA) credential.
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