Financial literacy is a set of skills and knowledge that help you avoid spending too much and multiply your savings. These include budget planning, knowledge of credit and insurance products, ability to manage money, pay bills correctly, invest and save.
Financial literacy is like a school subject. You start out with the basics and learn more and more useful tools over time.
There are three main approaches that people who know how to handle money take.
Maintain a monthly budget. To learn how to spend less than you get, you need to keep a budget. It is necessary to take into account income: salary, investments, tax deductions; fixed costs: rent, utility and loan payments; variable costs: food, shopping, travel and entertainment; saving.
Form a “safety cushion”. It will save you in an emergency such as losing your job or a serious breakdown of your car. The minimum amount of reserves is income for 3-6 months, the optimal one is for 12 months.
Invest in the future. You cannot take out new loans until the current ones have been paid off, as well as spend the loan money on entertainment and clothing. It is worth thinking about pension contributions and insurance, invest in training and buy only the equipment that is needed for work. For example, if you are a designer, a powerful computer that can handle complex 3D modeling programs and help you earn more would be a good purchase.
How to assess your level of financial literacy
To assess your money management skills, answer ten questions honestly. Give yourself one point for every yes. The more points, the higher your level of financial literacy.
- Do you maintain a monthly budget that includes all major expenses and income?
- Are you taking steps to reduce debt and credit obligations?
- Do you know your credit rating?
- Do you understand how much money you spend on average for a living within 3-6 months?
- Do you have a contingency fund to get you through sudden big trouble without borrowing money?
- Do you know how compound interest works and what role does it play in increasing your investment?
- Do you understand what types of insurance will help you secure your finances and investments?
- Do you benefit from tax deductions whenever possible?
- Do you pay utility bills on time?
- Do you understand the difference between investment and insurance?
How to improve financial literacy
If your test has determined that your level of financial literacy is not too high, here are some rules that financial literate people follow:
Ask yourself, “Will I be able to live without it.” The poor man is always chasing someone. The same big TV as the neighbor’s; the same cool car as a colleague; the same big house as a friend’s. And all on credit or debt. This pursuit of “success rates” makes it very difficult for a person to get rich. A rich person, on the other hand, will never buy something just because a neighbor has it? They only incur high costs when they can afford it. When their incomes are several times higher than their expenses.
Pay yourself first. Whatever income you receive and no matter how hard it is for you, at least 10% of all monthly income must be set aside. That is, to create a so-called “safety cushion” and reserve funds that you plan to invest in the future.
Make a financial plan (for 5 years or more). It is a habit of all rich people to draw up a personal financial plan, both short-term (less than one year) and long-term (for 5 years or more). All of them set themselves specific correct goals (those goals that can be achieved) and clearly follow the planned plan, making some adjustments if necessary.
Change your attitude towards money. Each person should understand that money is not a means of consumption, but a means of management and achievement of the goals and objectives set for you. Money is not just pieces of paper with which they go to the store, but finances, the correct management of which will lead you to financial independence.
Correct handling of money. To begin with, you just need to start keeping track of income and expenses, start spending less income received, learn to save wisely (ie, do not rush to stocks and sales and do not buy everything that is “cheap”).
Invest. It is necessary to slowly begin to master investments. Anyone should understand that money can work and generate passive income at the same time. But investments are always a risk and a person must learn to manage and diversify them.