Financial literacy has always been an important skill to have, that is, for anyone who hopes to run a successful business or manage money even in their personal lives. When faced with a proper amount, one quickly learns that it is not as easy as saving and investing but involves several different factors and considerations. It is even more important today in a more advanced business world where starting a business, running it, and even investing in one is highly procedural.
To become better at managing money, you must research and understand banking options, budgeting, saving, debts, and credit. Once you have a good grasp of these aspects, it becomes easier to apply them to yourself and get a headstart into being more financially literate.
This article explores the meaning of financial literacy and its main concepts. It offers tips on gradually improving your money management skills. Read on for more!
What is financial literacy and money management?
In simple terms, financial literacy can be defined as the ability to gain, understand and effectively use financial skills such as investing, saving, and banking. It means that you have the skills and knowledge you need to manage your money in a way that helps you achieve your financial goals and, ultimately, attain financial stability. This is fundamentally what money management is.
While most people would like to consider themselves quite effective at managing their money, the reality is different. A Global FinLit survey found that only one in three adults can be considered financially literate, meaning that about 76.99% of the adult population does not understand the basic financial concepts required to manage money successfully.
According to the Consumer Financial Protection Bureau (CFPB), being financially literate means having confident control of one’s finances in a way that allows one to use the money to acquire great satisfaction in life. This means that even if you don’t have that much money, you can easily prioritize to budget it as effectively as possible to get closer to your financial goals.
Importance of Financial Literacy and Money Management
Besides the obvious advantage of having control over the flow of your money, financial literacy is also very important for other reasons, including:
- Empowering you to make better financial decisions that align with your goals
- Helping you establish a budget to analyze your spending
- Helping you reduce your spending and save more money
- Creating a reliable retirement plan
- Accessing, understanding, and making better investments
- Managing your debt
- In general, financial literacy significantly improves the overall quality of your life.
In short, financial literacy helps you understand the flow of money and gives you control over it. It helps you make better decisions toward achieving your financial goals, which sets you on the path to financial stability.
Concepts of Financial Literacy
Budgeting means creating a plan for how to allocate or spend your money. It involves understanding the four uses of money (saving, investing, spending, and giving away) and then deciding how to split your money among them.
Your budget will often depend on your financial goals and priorities. However, the general aim should always be to pay off existing debts while still having enough to save and invest.
Financial literacy also entails understanding basic investing concepts such as stocks, indexes, risks, mitigation, diversification, and interest rates. You can carefully allocate some of your money to other undertakings that can make some good returns and push you closer to attaining financial freedom.
Borrowing money is inevitable today unless you always have access to a limitless amount. You may also have to lend it out. Understanding how debt works is also critical. One can easily find themselves in trouble with lenders if they don’t keep the proper tabs.
Before borrowing money, try to research concepts such as interest rates, loan terms, loan structures, payment periods, and the time value of money.
It is essential to have at least a basic working knowledge of taxes and how they work. Everyone pays taxes, so it is your responsibility to understand how the tax system works in your country. Each source of income from your investments is taxed differently, and the knowledge of concepts such as tax rates, reliefs, and exemptions can help you work towards achieving a decent financial standing.
Establishing financial goals will help you set aside money to meet them. You can calculate an appropriate amount to set aside whenever your money comes in, depending on your priorities. You may want to include the following while drawing your savings plan:
- Saving for retirement
- Saving for emergencies
- Saving to pay off personal debts
Ways to improve financial literacy
The first step towards financial literacy is to access the resources you need to understand the basic concepts of finance. If you don’t have clarity on how things work, make sure to scour the internet, books, or whatever you can get your hands on and gather the information you need. Some good resources include newsletters, podcasts, and social media. You don’t need to know as much as a banker or go to Wolf Street; you just need to learn enough to have a working knowledge of your current financial situation.
2. Start budgeting
You can draw a lot of helpful information about your spending from a budget. It will help you check your financial goals, monitor your spending habits, and provide a clear picture of your financial standing. You can then start to work on your bad money habits and create new ones that push you toward your goals.
3. Working with credit
Use the available methods to check your credit score. Your credit score reflects your borrowing and pay-back habits. If you have a low credit score, dive deep into more resources to understand how you can bring it up and keep it there. The easiest way is to pay back your creditors in due time.
Suppose you have a high credit score, good for you! You can leverage this to make wise decisions to borrow whenever necessary.
4. Risk planning
There is always a chance that anything could happen and cause you to lose your job, investments, or earnings. You may quickly find yourself in a desperate situation if you are unprepared. While you can’t avoid this entirely, you can at least take some steps to prepare yourself for such risks by diverting them, mitigating them, avoiding them, or facing them but coming out in a better position to rebuild. This is what risk planning is.
In investing, for example, you can diversify and put your money into projects unrelated to the same risks. That way, if one fails, you have another to fall back on and regroup.
Suppose you need a more profound knowledge of finance for reasons such as running your business. In that case, you can also hire a consultant. Professionals are great at mapping out your exact situation and helping you draw feasible tailored solutions. This is common for complex financial aspects such as taxes and investing. If you can afford it, there is no harm in talking to a professional.
In conclusion, learning about finances and managing money is also essential for individuals and businesses. Earning a lot of it is not enough to ensure you have it when needed. Get the skills and knowledge you need by doing your research. You can also check out Crazy Money Facts for helpful information on money and managing it.