One of the most underrated skills in the modern age is financial literacy. Having the knowledge and understanding to responsibly manage your finances is incredibly important. Now you must be thinking, what is financial literacy? In the simplest of terms, being financially literate means you have the knowledge and skills needed to use your money responsibly. As mentioned above, financial literacy involves creating ways for you to effectively utilize your income for needs, wants, and the future.
It doesn’t matter if you make $10,000 a year or $1,000,000 a year. In each instance, you need to be mindful of how your money is utilized. As a rule of thumb, we must segment our income into three categories or buckets. These are expenses, savings, and investments. Our expenses are utilities, groceries, insurance, healthcare, and other important financial commitments. Our savings is a pool of money that we might be accumulating in case there is an emergency or to buy a new piece of furniture. Our investments are those financial commitments where you are putting away an amount of your income in different securities in the hope of building wealth over time.
Financial Literacy – Explained
In the modern age, there are many different financial tools that we use. In the past, these were different forms of cash but as technology has advanced, so has the way we deal with money. You now have credit cards, debit cards, automotive loans, student loans, checking accounts, and so on. As a result, it is important that these are managed so we don’t end up making financial decisions that harm us. We all know that being in debt or having mismanaged finances is one of the worst positions to be in. Luckily, this can all be avoided if one has financial literacy.
Components of Financial Literacy
When it comes to financial literacy, we must keep in mind that there are different facets of it that need to be taken into account. These are:
Budgeting
One of the most important decisions that an adult can make is practicing budgeting. We must be consciously aware of where our money goes and how to extract as much value from it as possible. When budgeting, the most important areas to be wary of are:
- These are the expenses we incur along with the odd splurge on a pair of shoes or meal at a fancy restaurant. We must plan these ahead and it becomes incredibly helpful if you automate this process. Each time your income comes through, all these expenses are deducted and you have a net balance to work with. This also prevents missed deadlines which could result in unwanted fees.
- A savings account is important for anyone who wishes to have disposable income available at all times. Savings could be in the form of an emergency fund, a college fund, or an account where you simply want to store a cash amount in case you lose your job or need money immediately.
- This is the money that you put into different securities in hopes of growing it over time.
Investments
One of the most important financial decisions for anyone to take is to invest their money. Having cash in a savings account is a nice way to keep your money available but the value of this money will decrease as inflation goes up. Instead of holding large amounts of cash, it is advised to invest your money into stocks, bonds, gold, mutual funds, or index funds. These are different tools used to create wealth over time owing to their ability to grow your money over a period of time.
From this list, mutual funds or index funds are some of the safest options to pick from. As opposed to investing in a single stock where the risk is high, one can invest in a fund that is made up of a diverse number of shares from different industries. It is kept this way to reduce the risk as much as possible because it is assumed that not every industry is going to suffer at the same time. If the tech sector is down, the retail and healthcare sectors can create a means for your wealth to grow.
Before you get into investing, it is important that you do a lot of research on the different products on offer. You don’t want to invest in something you don’t fully understand.
Taxes
No matter what you do, you will always need to pay taxes. Learning the different types of tax, how much they are, when and where they apply and filing your returns is important. If you do not have at least a fundamental understanding of how things work, you might end up paying a lot more than you need to. Taxation literacy will allow you to establish a certain degree of economic stability along with better financial performance. In the long run, this will prevent unnecessary depreciation of your money and allow you to grow your wealth better.
Personal Finances
Financial literacy is a concept that entails knowing how to use your money properly. However, there is no one-size-fits-all because each person has different financial commitments and expectations. A parent of three has different financial commitments as opposed to a single person living on their own. Knowing how to properly spend your money is pivotal. For example, you want good internet but don’t want to break the bank trying to afford it. AT&T is the saving grace for people in this position because of its cost-effective and strong, smooth, and stable internet connection. Follow the link to learn more: www.buytvinternetphone.com/internet
However, it isn’t a rigid system that cannot be changed. Over time, consequences change and your spending habits evolve. If you made $20,000 a year in 2020 and now make $35,000 a year in 2022, you have more income to use which naturally changes your habits.
For example, if you used an old TV before, a rise in income allowed you to upgrade to a better one. It also allowed you to get all your favorite streaming services to watch your favorite shows. DIRECTV is ideal for someone who wants a cost-effective, one-stop solution for someone looking to get their favorite streaming services. To learn more, visit here and get yours today.
Conclusion
As much as we try to avoid it, money is important. It pays the bills, we use it to get food, and when we like something, money lets us get it. Knowing how to properly manage money is a skill that everyone needs to be taught from the beginning. It allows you to create good habits and allows you to have an edge over other people. Understandably, there is no template that everyone can follow since each person has different financial goals and commitments.
Financial literacy isn’t a course you can take, it is a gradual process of trial and error combined with changing consequences. Basically, you learn as you go.
