As my D&D setting is a far future (Apocalypse + 10,000 years or so) Earth, I use "actual" languages for "civilised" countries, with racial tongues for the non-humans. There are quite a large number of languages, with differing relationships to each other.
As for levels of knowledge I use the following system:
Language Levels. Languages have 3 Levels in both spoken and written forms.
Spoken:
Level 0 - Knowledge of a few words and phrases, e.g., Yes, No, Please, Thank you, Hello, Goodbye.
Level 1 - Basic working knowledge of the language, including a few colloquial terms, but accented.
Level 2 - Fluent. Almost like a native. In fact, probably only a native could tell that the character is a foreigner.
Written:
Level 0 - Able to recognise some basic words, e.g., Exit, Inn, Gold, Wanted.
Level 1 - Street signs, some of a newspaper, common notices and popular literature. Might struggle with “big words”.
Level 2 - Can read the ‘Classics’, e.g., Shakestoor’s "Hamhock", "The Merchant of Sausages" and “A Vintner’s Tale” or the Granbretanian historical epics “Aral Vilsn” and “La Magra Tasha”.
Characters get Language Points at the start of the game depending upon their Intelligence, with a chance of being Literate in their native language for free. After this, language levels can be bought with Skill Points.
Also, anyone having level 2 in a language gains level 0 (basic understanding only) in all languages sharing similar words and grammar.
I could go into further detail but languages in my world take 2 pages of text + a couple of charts to fully explain. A bit complicated, but I like it.