PERSONALISED INVESTMENT MANAGERS

Financial Literacy: Basics & Importance

27 September, 2018


          
            Financial Literacy: Basics & Importance

Financial literacy is the ability to understand how money works – how someone manages their money and invests it. It is the ability to manage one’s personal finance in an efficient manner.

You can easily compare Financial Literacy to the learning at school. In school, we learn concepts and apply those strategies later in life. Similarly, Financial Literacy helps us in taking better financial decisions and enables us to manage our money in our lives.

Generally financial literacy is required to understand how money works and how it can work for your financial goals. To understand personal finance and how it works, it’s important to understand common financial literacy principles such as – financial goals, budgeting, investments, superannuation, contracts and employment models.

Studies across countries on financial literacy have shown that most individuals don’t understand the concept of compound interest and some consumers don’t actively seek out financial information before making financial decisions. Most financial consumers lack the ability to choose and manage a credit card efficiently, and lack of financial literacy education is responsible for the lack of money management skills and financial planning for business and retirement.

It is therefore with the possession of right knowledge and skills that allow people to make smart decisions with their money.

Although understanding statistics and facts on money management are important, still there are many individuals with absolutely no clue on handling their money in a better manner. One has to be financially literate to manage the money properly and hence learning is the only solution.


Here are some important topics to understand your finances better.

Budgeting

Creating and maintaining a budget is one of the most basic parameters when it comes to Financial Literacy. In this digitized era, it is easier to create a budget with the help of apps in the smartphone.

Because of these apps, tracking your income and expenses has become so easy that one does not need to manage a separate excel or have extraordinary mathematical skills. You can set your monthly budget across various categories, and get to know on the spheres where you are overspending. Without proper budgeting, you won’t be able to increase your saving


Savings

A good savings habit reflects a good financial health. But, majority of people don’t prioritize on this aspect as much as they should. It is easy to ignore things like  a retirement plan as they seem to be so far off in the future event of things. We also tend to forget the benefits like compounding which come along with the early savings. Learning to save early in your working life can help you gain more wealth and achieve your goals well in time. A good saving habit is when you save around 25 – 30% of your earnings. And one must surely start early so that the savings habit becomes second nature to you.


Credit

Using Credit could be extremely useful – if managed and repaid correctly. There are lots of benefits in the terms of coupons, points, return gifts, if one uses the credit options wisely. Sometimes, people get carried away and start using credit much more than they can pay off. Ultimately they end up paying very high rate of interest on the loan taken.

Making careless decisions when you’re young can end up costing you throughout adulthood so it’s important to grasp the concepts and learn the responsible credit practices as early as possible. If at all you need loan or credit, it is very important to understand the objective behind the loan i.e. if it is a need or a want, can it be delayed, is it giving any tax benefits, or if there are any pre-closure charges.


Safety in Financial Transactions

Theft identification has become more important than ever. Since everything is digital and just about everyone has shopped online at one point or another, our financial information is more vulnerable to frauds. Understanding this and taking preventative measures, like password protection and limiting the amount of information shared online can be the key to maintaining safe accounts or else it can lead to a financial wreck.


There is a famous proverb – ‘The art is not only in making money, but in also keeping it.’

Hope we all learn how to keep ours and grow it prudently.


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