Financial Literacy in this Day and Age
Do you think you’re responsible with your money? Would you say you have financial literacy? If the answer is no: do not fret! In today’s blog, we’ll discuss all the skill required when being clever with you cash. Plus, some additional tips and tricks including how to create a budget!
What is Financial Literacy?
Financial Literacy is when one has the set of skills and knowledge that allow them to make informed and effective decision with their resources. It is the foundation of our relationship with money. Thus, the earlier you start, the better off you’ll be. After all, education is the key to success.
Fundamentals
In order to obtain financial literary, the following components are essential:
Budgeting: There are four main way that determine a budget: spending, investing, saving, and giving away/ Creating the right balance allows you to better allocate you income. Thus, resulting in security and prosperity. An efficient budget pays off existing debt while leaving money aside for saving and investing.
Investing: Some components of investing are: interest rates, price levels, diversification, risk mitigation, and indexes. Having a base line understanding of stocks and how their influence will help with increasing and inflow of income.
Borrowing: Almost everyone borrow money in their life, whether it be for college, a house, or on their credit card. To do so effectively, you must understand: interest rates, compound interest, time value of money, payment period, and loan structure. Doing so will decrease long-term financial street.
Taxation: This component is crucial in gaining financial literacy. Each source of income is taxed differently whether it be employment, investment, rental, inheritance, or unexpected. Being aware of these different tax rates increases your income management.
Personal Finance Management: This component is a mix of the aforementioned fundamentals. Financial security is achieved by increasing investment and savings while reducing borrowing and debt. Having a good grasp on this balance ensures financial literary.
Benefits
So, now you know what you should know. But, why should you know it?
Financial literacy has benefits such as:
- Ability to make better decisions
- Effective management of money and debt
- Better equipped to reach goals
- Less stress and anxiety
- Creation of a structured budget
Tips and Tricks
The following strategies will develop your financial literacy.
- Create a Budget. Track how much money you receive again how much you spend. This should include: income, fixed expenses, (rent, utilities, loans), other spending (groceries, shopping, and travel), and savings.
- Pay Bills Promptly. Take advantage of automatic debit and sign up for payment reminders.
- Check Your Credit Score. A good score helps you get the best rate on loans and credit cards.
- Invest In Your Future. Sign up for 401k or consider opening a retirement fund. Develop a financial plan now that will help you reach the goals of the future.
How to Budget
Senator Elizabeth Warren popularise the 50/20/30 budget rule — a great way to improve your financial literacy. The basic rule is to divide up after-tax income as:
- 50% on needs
- 30% on wants
- 20% on savings
50%: Needs. These are the bills you absolutely must pay. Plus, anything else necessary for survival including: rent, groceries, insurance, health care, debt, and utilities. Are you spending more than your needs? Consider down-sizing.
30%: Wants. This is anything “optional” if push comes to shove. While it includes dinner, movies and vacations, it also includes picking one more expensive choice over a cheaper one.
20%: Savings. This includes: adding money to an emergency fund, making IRA contributions, and investing in the stock market. We suggest having three months of emergency savings in case of unforeseen events.
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