April is Financial Literacy Month.

Financial literacy is the possession of skills that allows people to make smart decisions with their money. Although understanding stats and facts about money is great, no one has truly grasped financial literacy until they can regularly do the right things with money that lead to the right financial outcomes. When you have this skill set, you’re able to understand the major financial issues most people face: emergencies, debts, investments and beyond.

Financially literate people know their way around a budget and know how to use sinking funds. Here are just a few of the concepts financially literate consumers have mastered:

Budgeting

Most Americans live paycheque to paycheque, and it’s largely because of a gap between what the maths say they can afford and what they actually spend. Financial literacy can make people habitual budgeters who are willing to save for their goals and delay gratification to have peace of mind today and in the future.

Emergencies

Only 44 per cent of Americans would be able to cover a $1,000 emergency today. About 40 per cent wouldn’t be able to cover a $400 emergency. People who become financially literate understand the wisdom of saving for those times when life happens.

Debt

In addition to mortgages, which amount to nearly $9 trillion in debt nationwide, Americans are burdened with auto loans, credit cards and student loans. The Federal Reserve Bank of New York reported in 2018 that the total consumer debt in America had reached $3.95 trillion. To see how that debt load impacts daily living, consider the fact Northwestern Mutual reported that 40 per cent of Americans spend up to half of their monthly income in debt payments. A big part of financial literacy focuses on understanding how the time and money people spend on paying off debt hurts their ability to invest in their future.

While there’s no one sure way to measure how many people are financially literate, the lack of certain skills would confirm that guess. For example, if you used the number of people who don’t live paycheque to paycheque as an estimate of financial literacy, only about 20 per cent of people would qualify.

Are you financially literate?

To help you decide whether you should include yourself among the financially literate, think through the following questions:

Do you know how to create a monthly budget that includes all your basic expenses, your bills, any debts and your sinking funds for future purchases?

Are you currently debt-free, or are you taking active steps to reduce your debts?

Do you know about how much you spend to cover living expenses over a period of three to six months?

Do you have an emergency fund in place that would allow you to get through a sudden, unexpected life event without borrowing money?

Do you understand how compound interest allows invested money to grow over time?

Do you know the various kinds of insurance needed to protect your finances and investments?

Do you understand the difference between an investment and insurance?

Hopefully, you were able to answer “yes” to all – or at least some – of the assessment questions. But in case you found yourself answering “no” to some, don’t be discouraged. There are steps you can take to get a better understanding of how money works:

Start a beginner emergency fund

Begin by saving up $1,000. This is to keep you from being thrown off track when those inevitable, tough financial events hit you. Don’t worry if this doesn’t sound like a lot of money. You’ll be growing this emergency fund very soon.

Get out of debt

To rid yourself of debt, start by listing them from smallest to largest. Then, use the debt snowball method to pay them off. As you pay off the smallest debt, roll what you used to pay towards it onto the next largest debt. Repeat this process until all your debts, except for your mortgage, are gone.

Finish your emergency fund

To complete this step, move all the money you freed up while paying off debt towards growing your emergency fund to three to six months of expenses.

Invest 15 per cent of your income for retirement

It’s never too late to plan for retirement: 87 per cent of students who take a finance class agree they feel confident about investing. You can face the future with hope when you have a plan that includes smart retirement investment.

Use good growth stock mutual funds: investing 15 per cent can help ensure you beat inflation over the long haul, while still having enough income to put towards paying off your home.

Save for college

Over half (51 per cent) of students who learn about finance in high school plan to pay for college themselves.

Pay off your mortgage early

This monthly housing payment is one of the biggest expenses for most people. Imagine owning your home free and clear!

Build wealth, and give generously

The purpose of financial literacy isn’t just head knowledge. The real goal is to be able to use your money to do the things you want to do, like retire with dignity, spend free time with family and give to worthy causes.

By now, you may have a pretty good sense of where you stand in terms of your own financial literacy. Maybe you have a lot to learn, but I hope it’s encouraging to know how increasing financial literacy could transform you, your community and maybe the entire nation!

• After winning $500,000 in scholarships and graduating from her dream school with a bachelor’s and a master’s degree, Kristina Ellis set out to help students create their own plan to earn a debt-free education. She’s the bestselling author of Confessions of a Scholarship Winner and How to Graduate Debt-Free. As a Ramsey Personality, Kristina helps thousands of families nationwide navigate the complex waters of college finance and graduate debt-free