Financial problems are something that can happen to everyone sooner or later. Even if you have a great income and you don't limit yourself too much in your spending, because there is no need for this, it is still important to pay attention to effective management of your own finances. We live in quite unstable times, when everything can change quickly. That is why you need to be ready for anything. Be that as it may, money plays a very significant role in our lives. The world is so arranged that it is impossible to live without it. For this you need financial literacy.
What is it? In short, it is certain basic knowledge and skills that are necessary in order to wisely distribute your finances, taking into account income and needs. The ability to properly manage money is one of the key components of a successful life today. It is not for nothing that truly wealthy people, for example, pop stars, popular actors, famous and successful athletes, politicians hire special people who take care of their finances - managers. An ordinary person can do this on their own. You need to master such aspects as financial planning, creating a safety cushion, investing, and achieving financial independence. This is what we propose to talk about further.
What is financial literacy?
A brief definition has already been given above, but let's try to consider this concept in more detail, dividing it into certain aspects so that the reader can thoroughly understand this topic.
Financial literacy is the possession of certain skills that enable one to understand basics of finance and their principles, as well as knowing how banking systems, taxes, loans, investments work. It is also important to be able to apply this knowledge, skills and abilities in everyday life to financial management, because that's the whole point.
Why is it important to learn this and what will it give you? A person who possesses such knowledge and can apply it in practice is able to:
First, plan your personal or family budget. This involves determining your income and expenses to avoid debt and build up savings.
Secondly, create financial safety net – some reserve funds that will help you cope with unforeseen situations that can be solved with money, for example, a car breakdown, illness, etc. What should its size be? Of course, everything is relative and individual here, but the “gold standard” is when the reserve fund is equal to 3–6 months of your expenses. We assure you that living this way will be much calmer.
Third, assess risks. This means understanding when to invest and where.
Fourth, achieve financial independence – to provide for one's needs without depending on external sources of income, for example, another family member.
Financial literacy for beginners
You have to start small. First, you have to understand the basic concepts. There are certain rules that you have to follow if you want to learn how to allocate your money wisely. Speaking of basic rules of finance, then they are approximately as follows:
- Start keeping track of income and expenses. Many people ignore this. The point here is not that you don't trust your memory. It's just that everything is clearer on paper. Our brain is designed to perceive visual information better. The basic step to managing finances is understanding how much you earn and spend. It doesn't have to be a notebook or a notebook. We live in the 21st century. You can use special mobile applications for this. There are many free products.
- Do financial planning. It helps to define short-term and long-term goals. What are we talking about? For example, in the short term it could be paying off a loan in full, going on vacation, or treating a dental problem, and in the long term it could be buying a home, paying for college, or saving for retirement.
- Form the habit of saving. It should be at the level of reflexes. It will be much easier this way. For example, you can save 10% of your income. It's not a lot, but over time you can accumulate something. This will be enough to start with if you have never done this before. Regular savings create a financial safety net that will protect you in case of unexpected expenses.
- Try not to borrow. both from friends, relatives or acquaintances, as well as from banks or MFIs.
- Try to understand the topic of investing and start doing it. You can start with something simple, like a deposit, government bonds, or index funds.
How to become financially literate: useful tips?
Of course, knowledge will not just appear in your head. You have to work on your development. We offer you several recommendations that will allow you to learn a lot of useful things and learn how to apply this knowledge in life.
- Don't be lazy to read. There are many useful books on financial management, for example, "Rich Dad, Poor Dad" by Robert Kiyosaki or "The Path to Financial Freedom" by Bodo Schaefer. Literature should not be underestimated in the twenty-first century. It is as relevant as before.
- You can take several thematic online courses. This is convenient because it is available to everyone, regardless of where you live. There are both free and paid courses on financial literacy. Free ones are enough to get you started.
- If possible, it would be a good idea to consult with experts. For example, people who work in banks usually have a good understanding of how the banking system works and can tell you a lot of interesting things.
- Don't forget that theory is useless without practice. Don't be afraid to apply your knowledge and try something in real life. Start by analyzing your budget, and then you can move on to investing, for example, opening a deposit.
- Try to spend less than you earn. This is the only way to save money. If you manage to earn more than you planned, don’t rush to spend the excess on various “want”. Give yourself a few days to analyze the situation. You may not really need it, so it’s better to save these funds.
- Diversify your income – don’t rely on just one source. Create passive income. This way you can prepare in advance for unexpected problems at your main job. For example, if you are fired for one reason or another, you won’t be left without a means of livelihood.
- You shouldn't "put all your eggs in one basket." Why? Because if you drop it, they will all break. If you invest, it makes sense to consider different options to minimize the risk. Investments are always a risk. It's better to do everything so that in case of trouble you don't lose everything.
- Take out insurance to protect yourself from significant losses.
- Review your financial goals from time to time. This applies to both short-term and long-term. Adjusting them will help you move in the right direction and calculate more accurately.
- If you feel like you're not being paid enough, talk to your employer about getting a raise. If that doesn't work, it may be time to look for another job.
To summarize the above
Financial literacy is something that each of us should be able to do and know today, regardless of our income level. You can start small and over time you will be able to become more financially independent, you will have a certain financial cushion and you will achieve your financial goals faster.
