What is Financial Literacy?
Financial literacy is the ability to understand the financial skills such as savings, income, investment, protections and other, then apply different financial skills effectively, including personal financial management, budgeting, and saving. Financial literacy makes individuals become self-sufficient, so that financial stability can be accomplished.
Why is it important to understand Financial Literacy?
An individual needs to understand financial literacy to make him or herself financially independent but financial literacy also requires the understanding and experience of concepts such as financial planning, compound interest, debt management, efficient investment strategies, and money-time value. if an individual does not understand financial illiteracy then this can lead to poor financial choices which can have negative effects on an individual's financial well-being.
The foundations to achieve a good financial literacy is to learn about creating a budget, ability to track expenses, knowing how to manage debt, understanding the basics of investing and effective plan for retirement.
The Basics of Financial Literacy
- Income/Earn
Income is the money received by an individual in exchange for providing their service, investments and remittances. The sources of income are salary, wages, dividends and interest from saving. Before an individual start spending, saving or investing, it is important for an individual to know how much money they make.
It is also important for an individual to understand Net Income and Gross Income since; for a salaried person, the person should know the deductions on their salary such as provident fund, health insurance etc... and for a person who does not have a fixed income, it is important to understand the net income.
- Expenses/Spending
Expenses is the payment made by an individual for receiving any service or goods. In order to create a personal financial budget it is important for an individual to track his/her expenses. If an individual has a goal and his/her expenses is high then the person needs to reduce the expense in order to achieve the goal.
It is important for a person to track their expenses in order to achieve their financial goal.
- Saving
Saving is the portion of money not spent, or portion of money kept aside for future consumption. Savings must also include emergency fund, retirement plan and saving for big purchases. It is recommended for an individual to start saving as early as possible as no one can predict the uncertain future.
- Borrow/Loan
At some point of time even for a diligent saver a time might come for them to avail a loan or borrow money from their friends or families to finance a big expenditure. Borrowing is not necessarily a bad thing for an individual as long as the person can compare the interest rates and make the regular EMI.
It is important for an individual to understand why they are borrowing and how much they should borrow and whether they can afford to pay the EMI.
- Investment
An individual should have the knowledge about the investment plat form available in the market. Investing in the stock market can have a good returns in the future or maybe pay an individual a decent income in the form of dividend. But investing can be risky since the market is volatile.
- Protect/Protection
We all understand that future is uncertain and we never know what the future might bring so, in order to face the difficult times in the future and help make an individuals family secure purchasing policies from insurance companies like life insurance or health insurance is a wise option.
0 Comments