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Financial Literacy 101

Written by
Samantha Rose
Samantha Rose is a personal finance writer covering financial literacy for OppU. Her work focuses on providing hands-on resources for high school and college-age students in addition to their parents and educators.
Read time: 7 min
Updated on May 1, 2024
young man holding glasses and looking at his laptop to learn financial literacy 101
Personal finance can be tricky. Here are tips to help you with the fundamentals.

Personal finance can be hard, complicated, and overwhelming; but it doesn’t have to be.

We created a list of core concepts and skills that form the foundation of personal finance.

Call it financial literacy 101 or financial literacy fundamentals; these are the essential personal finance lessons you can use to identify negative money habits, implement better ones, and start living a financial life aligned with your goals.


The golden rule with finances is to spend less than you make. The hard part is putting that into practice.

Identifying income and expenses

Write down all of your money sources. These might include paychecks from work, odd jobs, and monetary gifts. Then, write down all of your expenses. Focus on a single month to make the task manageable.

Categorizing expenses

After you have listed your expenses, organize them into broad categories. For instance,  “food,” “housing,” or “entertainment.” These categories will form the basis of your budget.

Reducing expenses

Bringing spending in line with income is critical for financial health. If you consistently spend more than you make, at some point you’re going to get yourself into financial trouble.

“Wants” and “needs”

The best way to reduce spending is to focus on non-essential expenses. These expenses are called “wants,” and they’re different from “needs” such as housing and food. “Want” expenses are luxuries and should be avoided if your total expenses exceed your income.

Budgeting and Saving

Create a budget and stick to it. Use it to commit to a savings goal and balance your income and expenses.

How to create a budget

To create a budget, assign every dollar of income to one of your categories of expense. Give yourself a certain amount for housing, food, and all other “needs.” Be sure to create an expense category for savings and commit to directing a certain amount of income toward it each month. Any money that’s left over can be allocated for “want” purchases.

A budget is a tool to improve spending patterns

Use your budget to make positive financial changes. Create, and stick to, a budget that will build your savings and balance your expenses and income.

How to find money to save

While it might seem difficult to set aside money to save when you have mounting expenses, there are tricks to reducing expenses. Review all of your “want” expenses and look for areas to make cuts.

How to allocate money to a savings fund

Adopting the “pay yourself first” method will help you direct money toward savings. Consider savings as another necessity in your list of expenses. When you create your monthly budget, allocate money for savings just like you would for housing or food.

How to set financial goals

Choose concrete savings goals and include them in your budget. Perhaps you want to travel. Set aside money for a trip. Be sure to include goals that advance your financial health such as creating an emergency fund.


Credit generally means buying something now and paying for it later. Responsible use of credit can allow you to make important purchases such as buying a home or paying for an education. Irresponsible use of credit can create unmanageable debt.

Credit can be used as a financial tool

Credit allows you to purchase items that you otherwise wouldn’t be able to afford all at once. For instance, the cost of a house or a car is outside the financial means of most people. However, using credit in the form of a loan allows you to make the purchase and pay for it over time.

Credit comes in many forms

There are many different forms of credit. Mortgages, personal loans, and credit cards are all different kinds of credit.

Ways to compare the cost of credit

The use of credit is rarely (if ever) free—essentially you’re paying a lender to use their money. The best way to compare the cost of credit is to look at the effective interest rate or the annual percentage rate (also referred to asAPR). If other factors such as fees and customer charges are equal, the APR will provide an apples-to-apples comparison.

What credit reports contain

A credit report contains four sections: personal information, a summary of your financial accounts, a history of credit checks, and public records such as bankruptcies and liens. You can request a free copy of your credit report at

How credit reports and credit scores are used to determine creditworthiness

Your credit score represents how likely you are to default on debt. To generate your score, the three credit bureaus use factors from your credit report, resulting in a number between 300 and 850 reflecting your creditworthiness.

How negative information in a credit report can affect financial options

The higher your score, the more likely you are to be approved for credit and receive low interest rates. If your credit score is low, you may have difficulty obtaining credit and will likely face higher interest rates if approved.

How to improve credit

The best way to boost your credit score is to consistently pay your bills on time. It takes time to create a strong history of on-time payments, and for this reason, it often takes time to improve your credit. Keep in mind that not all bill payments are reported to the credit bureaus. Utility companies, for instance, often don’t report your payments, but credit card companies almost always do. Payments must be reported to the credit bureaus to have an impact on your credit.

How credit and debit cards work

Credit and debit cards allow you to make purchases. A debit card automatically withdraws funds from your checking account while a credit card uses a buy-now-and-pay-later system. Each month you will receive a bill for credit purchases. To avoid fees and interest, pay the bill in full ahead of the due date each month.

When to use a credit card or a debit card

A debit card is a great way to practice using a bank account with low risk until you master the art of managing your money. Credit cards allow you to make a purchase now and pay for it later, but it comes with a higher risk of falling into debt. Only use them for purchases that fit within your budget.

The advantages and disadvantages of both

Debit cards are typically free when you open a checking account at a major bank. Other than potential overdraft-related fees or maintenance fees, you are unlikely to drain your account and risk debt. Credit cards are more flexible, allowing you to start building your credit report and score, but can rack up debt if you are not vigilant.

Debt and Loans

Sometimes the cost of taking on debt and taking out loans is a good investment. For example, a student loan allows you to fund an education in hopes of qualifying for a better-paying job.

What is debt?

By using credit or a loan, you will receive a good or service now but pay for it over time. Debt is the portion of money that has not been repaid.

The risks of debt

When you borrow more than you can repay, you risk excessive debt. An indicator of excessive debt is if you can’t make the minimum payments on your debt(s). A change in your financial situation can impact your ability to repay, which could result in repossession, garnished wages, negative credit, and increased interest rates.

When is debt good or bad?

Decide on whether debt is good or bad by how it impacts your net worth; the difference between what you own and owe. Good debt, like a student loan, will likely increase your salary-earning potential and lead to a larger net worth. Bad debt, like excessive spending on luxury items, reduces your net worth.

How to reduce debt

First, free up money by separating wants and needs. Then, trim down on want expenses. Start with paying the monthly minimum and then make additional payments on outstanding debts. Finally, pay off one debt in full by using the snowball method (prioritizing your smallest balance) or avalanche method (prioritizing your highest interest rate).

For excessive debt, work directly with creditors to consolidate loans, renegotiate repayment terms, or consider bankruptcy.

The consequences of missing loan or credit card payments

There could be serious repercussions for missing a loan or credit card payment. A negative mark from delinquency or default will remain on a credit report for seven years and likely raise a red flag for future lenders.

What delinquency and default mean

Delinquency occurs when a payment is overdue (typically past 30 days) while default occurs when delinquency status persists for several months. At that point, a lender decides that you are unable to repay, so they sell the debt to a collection agency.

How to prevent serious harm if a borrower misses payments

Be proactive by never missing a payment by setting up reminders and good planning. When a missed payment occurs, immediately contact your creditor to find a solution, such as renegotiating terms or seeking financial counseling.

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