Are you struggling financially and always finding yourself at the short end of the stick? The earlier you understand your current finances and how to optimize them will make you better equipped at making informed decisions, managing, and multiplying your financial assets according to your financial goals. Read on to make yourself more financially aware.
What is Financial Literacy and Why do You Need it?
People think that money is wealth but the real money is in being financially aware or literate. Financial literacy is the prowess to make sound financial decisions that result in desired financial outcomes. Being financially literate doesn’t start with allocating your funds wisely towards bill payments, savings, investment, etc. It starts from being able to write a cheque on your own, availing loans with lower interest rates, knowing how to file your taxes so that you can’t be fooled and even paying less in taxes with legal tax-free investments. Banks, public, and private financial institutions offer attractive credit schemes. Even though these may sound attractive, any scheme will benefit the benefactor and oftentimes at the cost of the benefactee. Falling for easy savings or even fraudulent schemes may jeopardize your financial stability for years. In the long run, being financially literate can help you make smarter decisions with whatever quantum of funds you possess and save you from incurring massive losses.
How can You Become Financially Literate?
Not being financially aware can cost you a lot more than the time you will take to learn the tropes of your money matters.
Fraud and Identity Theft
Almost everyone has shopped online today and this has made our private information more vulnerable than ever. People who understand how not to divulge their personal information to untrustworthy sources are clearly less vulnerable to financial fraud. To reduce the chances of falling victim to such frauds, you must keep in mind to never enter your card/account details over a public network/computer or store card details in online shopping websites. Don’t post any compromising details on social media, have a strong password for all your accounts and don’t divulge your bank/card information for any schemes over the phone or email
Difference between Assets and Liabilities
There are two parts of any balance sheet – Assets and Liabilities. Ideally, these aspects should be in balance. Anything that produces inflow of cash is an asset and anything that causes an outflow of cash is a liability. However, the definition is not objective and most people confuse between assets and liabilities. Owning a house or a car is not an asset but a liability because it is not creating any cash flow. Your house, car, or any property can be an asset only when it is producing an additional income. You must research what could be an asset or a liability and differ in investing from spending.
The easiest way to be aware of your money matters is to create, maintain, and stick to a budget. If you don’t have complicated income and expenditure charts, you can use the simple paper-pen method or even use mobile applications. For your business, you can use software applications that can help you keep a track of where your money is coming from and going to. For this to work, you need to set a strict budget for yourself and note all the expenses you incur. This will give you a good view of where your money is going. It doesn’t matter if you’re in college or are working, setting a budget and tracking your expenses will help you take care of your bare necessities and maybe even save some to achieve your financial goals.
It is easier to lose your credit score than to gain it. When you’re young, it’s easy to make rash decisions and ruin your credit score. Instant gratification without understanding your limits will put you in debt quicker than you can imagine. If you need a credit card, only spend the amount you are able to pay off before the due date. Otherwise, you may put yourself at risk of compounded interest rates and will be liable to default easily. While you might be able to pay the minimum monthly installments for your debt, in the long run, you will end paying much more in interest.
Learning about Interest Rates
Compound interest, a double-edged sword, is a crucial part of financial management. if you invest $100,000 in an index fund for 10 years with an average return of 10% per annum, you will earn an interest of $159,374 plus your initial investment. Leave that for another 10 years and you can earn an interest of $572,749. On the other hand, if you take out a loan, you might sign yourself up for long-term debt and may end up shelling out more than the principal amount. You will take way more from what you earn in the future as well. Take out a loan only if you really need to and consider a bank that offers lower interest rates, shorter payment cycles, etc. If you get how interest rates work, you will be able to make more informed and careful decisions regarding your loans and investments.
When you are young, you have lesser responsibilities, more appetite for risk, and the opportunity to save/invest for your retirement. Remember that you may have to pay much more to maintain the same level of lifestyle after your retirement. Investments can be done through instruments like 401(k), savings account for retirement, and IRA. You must also focus on creating a diversified portfolio that includes bonds, stocks, commodities, and government securities. You can also consider delaying your retirement as you will get more social security benefits and returns from your investments. You can also seek professional advice to help you plan better for a more relaxed life post-retirement.
Sometimes people are not concerned about their personal finances and tend to spend beyond their income. Instant gratification and the habit of living off credit cards can sever your finances even in the short run. Financial literacy is a part and parcel of becoming financially independent and should not be taken lightly. You can start by simply creating and maintaining a budget, spending within your means, saving a part of your income. There are plenty of online resources such as videos, courses, and webinars that can help you understand your personal finances and how to manage them.