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In the last 2 chapters, you learned the theories behind financial literacy. In this chapter, you will participate in building fundamental steps, as seen below:

How to

Make the commitment

This is a "must do" step to reach financial literacy. By now, you know that your actions and your attitude toward money are what drive your saving and spending habits. Hence, you have to make the commitment to yourself and your family to invest in taking responsibility for your financial situation. Your commitment has to be sustainable. In other words, you cannot decide to adopt a budget for one month and break it the next. Some individuals might have to seek professional help or get a targeted education before they fully realize they "need" to make the commitment if they are to reach financial security and freedom of choice.

Assess your financial situation

This step is a form of examination of your financial record. You need to examine each core of your earning, saving, spending, borrowing and protecting. This step is the process of financial discovery. It is to help you document your financial behavior and think of ways to improve your earning, saving and investing as you eliminate wasteful spending and make plans to stay protected in insurance and retirement. This assessment is critical, as it builds the foundation for your improvement.

Clean financial clutter

This step means many things to many people. Basically, it is a suggestion for you to become organized in your financial transactions. You need to eliminate the clutter so you can focus on improving your financial situation. An example would be to dedicate a physical or cyberspace to conduct your financial transactions so you stay organized, or re-grouping your credit cards into a manageable 2 or 3 cards. Cleaning the clutter is the result of taking actions after you assess your financial situation to improve your financial transactions and get a handle of your financial records.

Create a budget

This step is the foundation of financial literacy. A good budget has to be sustainable, and simple to follow, so you don't break your commitment out of frustration. A budget has to allow for freedom of choice items and still maintain the security concept we discussed in the prior chapter. A budget that does not give you security and freedom of choice is not a successful budget. To learn more about how to create a budget, visit the Budgeting Module in this financial literacy series.

Know the rules

In addition to understanding the theories, core competencies and elements of financial literacy, you need to know the rules for financial success. The 2 most important rules are the 20/10 for managing debt and the rule of 72 for managing investments.

1. Rule of 20/10 - Your total outstanding debt should not exceed 20% of your total net yearly income. Your monthly debt payment (not including mortgage) should not exceed 10% of your monthly net income.

2. Rule of 72 - To find out how long it takes for your invested money to double in value, Divide 72 by the expected interest rate you hope to earn. The result gives you the approximate number of years it will take for your investment to double. Years to double = 72 / Interest Rate

Practice

Now that you know how to make informed decisions, think about paying it forward and discuss steps to financial literacy with a friend or a family member.

Congratulations! You can move on to Chapter 4. Freedom from debts

To review the full module on Financial Literacy Overview (FLO), click here.