Last month, we discussed the concept of financial wellness and the four pillars on which it stands. Today, we’re going to take a deeper dive in financial literacy.
We all aspire to have financial stability, but most of us don’t have the knowledge and skills to achieve that goal. Handling your personal finances to gain financial stability and security starts with being financially literate.
What Is Financial Literacy?
Financial literacy is the ability to acquire knowledge and skills to make well-informed decisions to effectively manage your personal finances.
Why Is Financial Literacy Important?
Financial literacy gives us access to the essential knowledge and skills to manage our money effectively. Otherwise, the financial decisions we make, that are not based on a solid understanding of these foundations, may have dire consequences. Many people working today don’t expect to have enough money allowing them to retire comfortably. More shockingly, most workers can’t afford emergency expenses! "Financial literacy is important because it allows an individual to understand and maximize whatever level of income they earn. It helps people transform their lives. That’s why we do it, and that’s why it’s important.” – Latoya Goree, Director, Office of Financial Literacy at UMKC
What Are the Key Areas of Financial Literacy?
A budget is a tool used to keep track of your income and expenses over a specific period of time. It is also the first step in financial literacy. Having a budget simply allows you to track, plan, and monitor your financial transactions. The purpose of having a budget is to understand your spending habits and changing them, if necessary, to maintain your financial goals.
Growing up, we were always advised to save our allowance or the money we made from a summer job. The simplest way to explain how saving works is:
Money You Earn – Money You Spent = Money You Save
Unfortunately, we live in a world that encourages us to indulge in consumer behavior. Thus, fighting the temptations to spend could be rather hard for some people. However, it’s easier to grow your savings, whether by spending less or finding a way to earn more, by creating a monthly, or quarterly saving goal. So instead of hoping to save what’s left of your earnings after spending money on your necessities and entertainment, you should set aside a fixed amount of money each month.
Simply put, debt allows you to spend today, the money you will earn in the future. It’s a tool that allows you to achieve certain goals much sooner than you would have normally. Nevertheless, there is a dark side to that! By taking on debt, you give away your financial freedom. To reach financial wellness, you must not take the decision of taking on debt lightly, while constantly working on eliminating your current debt. There will always be situations where using that magical tool will be almost unavoidable, but you need to have self-discipline and persistence to avoid unnecessary debt.
What is even better than having savings is using your savings to earn more money! The key to financial security is to create more wealth through wisely investing your savings. However, making the right investment decision might be hard sometimes, since it requires a great deal of knowledge and research.
Tips for making wise investment decisions:
- Consider investing your money in one or more type of savings product offered at banks, which is a hassle-free investing option
- If you are planning to invest your money in a certain business or even in the stock market, you need to take your time to evaluate the risks.
- If the investment seems too complex to comprehend, then Do Not Buy It!
- There is no fast track to getting rich, so be patient!
In conclusion, having financial literacy is the key to finding financial wellness. Though it requires a level of self-discipline and will power, it could ultimately change your life around to the better!
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