Why do some people who have the same income have a different quality of life? Some barely make it to the next paycheck, all major purchases are made on credit, illness or major losses are like a disaster for them, and they prefer not to think about retirement at all, as their imagination paints them a bleak picture of a beggarly life.
Others pay off mortgages and bank loans ahead of schedule, which was favorably arranged thanks to resources like Fit My Money, The Balance, or NerdWallet, regularly change their car and apartment for larger and more expensive ones, go on vacation without loans, and have accumulated money for retirement, which will help them to live their mature years of life calmly and interestingly. They are ready for troubles that may happen in their lives, such as temporary loss of a job or health.
Nowadays, the topic of financial literacy has become very popular. There are many books, and courses (including online) on financial literacy, just as many people offer financial consulting services on the Internet. Recently, schools and circles for teaching children the basics of financial literacy have been gaining momentum. Even banks hold special events for their clients – financial literacy days for children and adults.
Basic Principles of Financial Literacy
Even though we live in an age of easily accessible information, not everyone can boast of a high level of knowledge in the field of finance or even the ability to effectively manage their income.
However, in recent years there has been a positive trend in this matter. According to the results of several surveys, we can say that the population is becoming more and more interested in this topic. This is facilitated by an increasing number of sites on financial topics and, oddly enough, the emergence of literature that tells about the conduct of household money management.
Speaking about the basics of financial literacy, several principles will help you understand this “science” and direct the inhabitants in the right direction:
Setting Specific Goals
The desire to achieve something stimulates us to work and makes us give more. Any idea can be realized if it is divided into several quite real local tasks.
Planning and Accounting
You need to learn how to plan, draw up and manage your budget (or family budget). This will help develop a serious attitude towards spending and clearly show where you could save. In addition, it will turn out to create some savings, which can later be turned into investments.
Formation of Savings
Not everyone cares about this, but creating conditions in which it will be easy to survive temporary losses (say, the loss of a job) is a very important principle of financial literacy. In household practice, most often people adhere to a scheme according to which they have from 3 to 6 salaries in their “stash”. This will allow you to hold out in the event of force majeure or a crisis for a sufficient time. In order to raise money, you can set aside a small part of each salary. This will not hit the budget much and will make you feel more confident.
Work is not the only source of income
Even if you have a good career and a decent salary, you should not stop there. You need to diversify your profits. In other words, you need to make sure that the person or family budget is replenished from various sources. This will reduce losses in case of unforeseen circumstances.
Investment of funds
For many people, the concept of investment is alien, which is very vain. Instead of being spent on frills, expensive food, jewelry, etc., the extra money can be put to work, and it will generate passive income. Of course, there are risks here, but they can also be minimized by investing in various financial instruments.
According to a recent Financial Industry Regulatory Authority survey, millennials are more prone than older individuals to engage in dangerous financial activity. The research examined several variables, including investment decisions, credit card use, and debt levels.
While millennials were more likely to take on risks, they were also more likely to seek out information about financial products and services. In contrast, older adults were more likely to avoid risk altogether.
This difference may be due in part to the fact that millennials have come of age during a period of economic uncertainty. With stock markets fluctuating and jobs often disappearing overnight, it’s no wonder that young people are more willing to take risks in pursuit of higher returns. Whatever the reason, it’s clear that different age groups have different levels of financial literacy and assess the risks of financial transactions differently.
How to become financially literate?
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Analyze your income and expenses. Check which expenses you can waive and how much you can save accordingly. You need to optimize all costs, including small ones.
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Use special programs to record income and expenses.
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Learn how to save money and invest it. Aside from bank savings, you may also invest in bonds, real estate, and your own company.
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Use loans carefully.
Discipline is another crucial trait in money distribution. You will be astounded at the outcomes if you start spending strictly within your budget, train yourself to count money, and keep track of the amount on your credit card. More than 80% of individuals spend their money irresponsibly, enabling themselves to purchase anything they want at the time. Only 20% think about and evaluate every expenditure. Thus, by cultivating the habit of conscious consumption in yourself, you expand your budget and have the opportunity to generate passive income and live for your pleasure for 10 years.
Conclusion
Financially informed people make responsible financial decisions and feel protected, because they care about personal financial well-being and financial independence at every stage of life, forming a financial cushion in advance in case of crises and force majeure.
In addition, due to the appropriate level of financial literacy, people will make more informed decisions about how to manage their family finances, and how to take advantage of certain opportunities provided by the financial sector.
All this, on the one hand, will allow the development of the banking system, non-banking institutions, and the real sector of the economy, and on the other hand – it will create opportunities for increasing the welfare of families.
