5 Key Components of Financial Literacy
Many among us are well educated, have multiple degrees, and doing good in our respective fields. But when you talk of finance-related stuff, they get nervous and jittery. Financial education should have been included in our school curriculum but unfortunately, it is not. If you think you are not having much knowledge about finance, and by finance, I mean things that are required in normal routine life and not some fancy stuff, then start by understanding these five key concepts. This will help in improving your financial literacy and overcoming the fear associated with it.
Basics of Budgeting:
This is the most basic aspect that one should master to stay on top of your finances. It is required by everyone right from a teenager to a housewife, a worker to a corporate executive.
You need to know your earnings and income and based on that you need to create and maintain a budget allocating resources for various expenses and keeping a part of it for savings and investments. If you don’t have a budget, you often wonder about the end of the month when all the money has vanished. Don’t find an excuse saying that your math is not good, or you don’t have the time or financial literacy skills to make a budget.
There are ample free tools available these days both for Android and Apple phones which are user-friendly and can help you make a budget and keep proper track sending reminders of payments, or notifications if you go overboard, etc. Mastering the basics of budgeting is where any financial novice should begin from.
Prioritize Saving:
To have a healthy financial situation, saving is a must. Spending all that you earn can lead you to a mess if some unexpected expense arises. You need to inculcate the habit of saving and investing quite early in life but if you haven’t, start it right away.
Whatever little you earn, save a part of it for the rainy day and then budget your expenses from the remaining. Often people wake up when it’s too late. Don’t make that mistake and never ignore provisioning for things like Kids' higher education, your retirement, etc. Time just flies so don’t procrastinate and start taking control from today.
Understand Credit-Debt Cycle Traps:
Most of us are happily swiping our cards while making payments. You need to understand the credit-debt cycle traps and use them judiciously. They are a wonderful tool if used properly but if you let them rule your mind, you will end up in a vicious cycle which can ruin you. The credit card should be swiped for only that much of the total amount that you can pay on the due date.
If you fail to pay that, most credit cards attract a charge of 1.5-2% a month which translates to a whopping 18-24% a year. Use your cards for availing of the convenience they offer like the free credit period but never get into a mode where you have to pay interest on the spent amount.
Understand the Power of Compounding:
You must have heard this several times but try to understand the magic that is associated with compounding. It is called the eighth wonder of the world for some reason. You can go through my blog post-Common Mistakes Due to a Lack of Financial Awareness to understand more about it.
Identity Theft Issues & Safety:
We are living in a digital world today. While it has provided a lot of flexibility and convenience it has also opened a whole new set of identity theft issues, privacy and safety concerns. Today we shop online, we transact online, we play online, we post our pictures and information on social platforms, etc.
why is financial literacy important?
All this makes us more vulnerable to fraud if we don’t take the required precautions. Understand the dos and don’ts and take preventative measures, like having proper passwords and keeping them protected, limiting the amount of information that you share online, etc. It is important to safeguard yourself against the threats that exist in the digital world.
Start by practicing these simple concepts if you are a complete novice and soon you will start getting the hang of things.