To begin with, the concept of “financial literacy” should be divided into two categories: professional and personal. Financiers, accountants, auditors, commercial directors, etc., can manage finances professionally (each with their level of responsibility). We will talk about personal financial literacy, which is necessary for every person who wants to achieve life’s financial goals.

Financial literacy is a set of approaches, rules, and practices that we can use to manage our financial flows so effectively that it will allow us to become more affluent, achieve our goals, and not lower our standard of living, even in adulthood.

Portrait of a financially literate man

Even better will show the essence of the concept of a portrait of a financially literate person. I formed it based on my experience of working with different clients. So, in my opinion, a financially literate person:

  • can calculate their income and expenses (i.e., knows how much money they spend per month);
  • can plan high-budget expenditures (recreation, children’s education, buying an apartment or car), but before that, assess whether it is ready for such a financial burden;
  • has clearly defined financial goals for a year or several years with a budget;
  • can save and invest;
  • rarely makes ill-considered, emotional purchases, and if it does, then strictly within the budget allocated to it;
  • has no loans, significantly “expensive” (loans from microfinance institutions, bank card loans);
  • He does not consider investing in instruments with a very high level of profitability because he understands that it is too risky (“financial pyramids,” dubious earnings on the Internet).

How helpful is financial education in our time

Financial literacy will protect against ill-considered decisions in irregular periods, such as investing in unnecessary things. Accordingly, it will save money or dispose of them wisely. Also, if you are a student in school, college, or university, financial education may be helpful as you use only reliable proofreading services for checking your academic coursework. Of course, you are sure that help with proofreading is necessary nowadays, so you can ask someone to proofread my paper or story in the library. But financial education is no less critical.

Basic principles of financial literacy

In general, there are many principles of financial literacy. Among the main ones are the following:

  1. Know and control all financial flows and sources. This can be done both in Google Spreadsheets and with the help of various applications and services (I recommend MoneyWiz). And it is essential not only to analyze costs and look for opportunities for savings regularly.
  2. Regularly replenish your reserve fund. We need to reduce the risks of losing money in the future, to provide ourselves with the opportunity to survive crisis moments, such as job loss, calmly. The reserve fund should cover the costs for at least three months, preferably half a year. It should keep money in the form of low-risk and highly liquid instruments. These can be cash, funds in the accounts of reliable banks, and deposits with the possibility of termination.
  3. Make a budget for the next few months or a year, and plan significant expenses. Take, say, such a category of costs as a vacation. It is worth figuring out how much money you are willing to spend on vacation in advance. Then there may be several approaches to accumulation: 1) to set aside a small amount of money, dividing payments monthly by year; 2) accumulate funds for several months, setting aside large amounts, and then use them when you have the opportunity to go on vacation; 3) raise money a few months before the planned vacation.
  4. Diversify both income and savings—the greater the diversification, the lower the risks. Take, for example, work. If you work in one industry, especially a narrow one, it is worth remembering that the crisis in this industry can leave you without a job and, consequently, without income. Therefore, it is best to seek extra income or master another specialty.
  5. Critically evaluate possible outcomes and risks before deciding and carrying out a particular financial transaction. This is especially true of loans and investments.

After all, millennials have a saying: “Everything you can ride, fly and live on should be rented, not bought.”

Frequent financial mistakes

The main mistake is to think that you have a lot of time and live “one day,” spending everything you earn.

№1. Systematically postpone the stage of accumulation “for later.”

This is when a person thinks in the format, “I now earn little, and I will soon increase the number of wages, then I will heal and start postponing.” Time goes by, and nothing happens. She continues to receive her salary, first pays back debts, buys gifts, and spends money on vacations. And only if after system expenses there are means, it postpones them.

There is a rule: “Pay yourself first.” Its essence is that today we have a financial obligation to us in the future, so saving money should be as mandatory a monthly expense as paying rent or utilities. At first, you can regularly save 3-5% of your income, and then gradually increase this figure to 10-20%.

№2. Don’t keep track of your expenses.

To check if you are making this mistake, name the amounts you spend on average each month on food, and travel, including taxis, gifts, and vacations. Can’t you? So you don’t have to worry about where your money is going.

It is worth starting to keep track of expenses and income. You can not do this all your life. Often a few months or a year is enough to understand the issue.

Conclusion

So as you can see, there are many pros of financial literacy. And you don’t need to be a hero to learn them. If you want to understand more about finance and financial literacy, we recommend the following book for reading, or you can research a unique course or lesson.

  • Book “The Richest Man in Babylon” by Samuel Clason;
  • Robert Kiyosaki’s Cash Flow Quadrant;

“Rich Dad, Poor Dad” by Robert Kiyosaki (it should be read carefully through filters because it describes some tools relevant to the United States but not suitable for other countries. But the basic ideas of compound interest and financial capital are well defined).

Categorized in:

Article