Financial literacy refers to the ability to understand and apply various financial skills, such as personal financial management, budgeting, and investing. Financial literacy is the foundation of your relationship with money, and it is a lifelong learning journey.
Financial planning can be difficult without a clear understanding of your current financial situation. Therefore, choosing your starting point is important.
The easiest way to assess both your current financial situation and your development over time is to determine your net worth. In essence, your net worth is the difference between your assets and liabilities, or what you own minus what you owe. It might be a sign that you are veering off course or a confirmation that you are excelling in your future financial plans. We have broken down this article into simple concepts to refresh your knowledge or get your financial literacy where you would like it to be.
We will shine a light on the four aspects of financial literacy. Debt, Budgeting, Saving and Investing.
Without further ado, let us dive right into debt first and see how understanding it contributes significantly to financial literacy and how we can best understand and leverage it to our advantage.
Pay Down Your Debt
Consider your life and future as an investment when deciding which debt is "good debt." Some debt can help you build a stronger financial future by allowing you to keep or increase your income, providing you with a valuable asset worth more than it cost, or assisting you in managing your financial life in a way that allows you to grow your wealth over time.
Due to debt being on our daily radar, understanding debt is a key format to great financial literacy. It will give understanding that there is healthy debt and unhealthy debt. View our breakdown for a better understanding of the two.
Healthy debt could fall under the following
- Student loan Debt
Student loans are considered "good debt" if they assist you in obtaining a degree and launching your career. Student loan debt, on the other hand, is not without risk. Some student loans carry higher interest rates and are more difficult to repay. So, before incurring too much student loan debt, be sure that the path you are about to take is strongly geared toward what you want to be in your working life one day.
- Home Loan Debt
Your home loan interest rate could be the lowest you've ever had if you have good credit. Ideally, you will be able to live in a nicer home than you could otherwise afford with a rental option, while also building wealth through home equity. Even though this is a difficult decision to make, many South Africans regard their home as an asset and a good debt investment.
- Small Business Debt
Small Business Borrowing to invest in a small business is considered "good debt" if it allows you to make more money and build a successful company. This type of debt, like borrowing money for higher education, should ideally help position you to earn more money in the future. Borrowing for your small business still carries risks, and you must ensure that your debt burden is manageable, but it can be a viable way to help your business grow.
Unhealthy debt could fall under the following
- Credit Card Debt
Although credit cards can also be seen as good debt if used responsibly it can also be seen as bad debt due to credit cards having high interest rates and fees that can quickly accumulate. It's natural to want to use our credit cards to manage our money, especially if we can earn rewards points or cash back. To avoid interest and fees, you should try to pay off your credit card balances in full each month, or as soon as possible.
- New Vehicle Debt
There are many responsible ways to handle the repayment or interest of a car, such as purchasing a demo or pre-owned car with fewer kilometers. Given that many people end up buying cars because they are dependent on them, it would be sensible to select an insurance provider that charges less or work toward saving up a sizeable down payment to offset a high monthly rate. Remember that buying a new car will result in rapid depreciation once it leaves the dealership.
For a course in debt why not visit the Money Academy by following the link below.
Budget well and the rest will follow
Saving is important, but spending is equally so. The two work well together, and you can't succeed unless they both succeed. Great budgeting leads to great savings, which leads to better investing. It's a two-way dynamic that requires both to collaborate in order to get the most out of our monthly and yearly budgets and contribute more to our investments.
A good budget allows you to prioritise your spending and keep track of your monthly expenses as you decide how to spend and save your money. Making a budget allows you to see exactly what is coming in and going out of your account. This can help you stay on top of your bills and monthly costs, plan to reduce any current debt, and avoid future debt, while also identifying unnecessary expenses or potential areas where you can save.
A budget is a useful tool for keeping your finances in order. It can help you become more aware of your spending habits and encourage you to stick to a realistic spending plan while also practising saving habits. Make a monthly budget and adjust it as needed to account for new expenses or changes in your household. Here is an example of a budget list.
- Budget List breakdown
- Food and Eating out
- Child care and Pet Care
- Savings and Contributions
- Monthly Services
- Vehicle Repayments
- Water and Sewage
- Retirement Savings
- Emergency Fund
The list above needs to be broken down and worked through with a fine-tooth comb for a better overview of your monthly expenses. The list will differ from one individual to the next so adjust yours accordingly.
In need of a budget template? Here is our free Wonga Monthly Budget Template for your convenience. We have also included our budgeting course, so head on over to the Money Academy for a detailed course in budgeting.
Invest and Secure Your Financial Future
Investing has many various options, but they all have one thing in common which they wish to achieve, and that is interest and compound interest.
- What is compound interest?
In simple words, you don't just earn interest on your principal balance when you use compound interest. Your interest also earns interest. When you compound interest, you add the interest you've earned back into your principal balance, which earns you even more interest, compounding your returns. This is the basis of all investing and what most people aim for when it comes to saving and investing. It takes many years to achieve but with a solid plan and consistency it can be achieved.
To learn more about investing view the Money Academy Investing Course. This course will give you insight into investing and will cover an introduction to investing, compound interest and common investment mistakes
- Where should one start
When it comes to investing, a retirement annuity is one of the best places to start. It is a very safe way of guaranteeing an investment option into your golden years.
- Investing in Property
Despite recent challenges in the property sector, investing in real estate remains a compelling proposition for many investors, and for good reason. While different parts of the South African property market behave and respond to market forces differently, the market has served the majority of those who have invested in it very well. Investing in property can include purchasing a home and renting it out, as well as profiting from yearly appreciation. It can also include purchasing a property, fixing it up, and then selling it for a profit. These three options, depending on how you approach this market, would be determined by your income, resources, and time.
- Speak to a financial adviser
Many banks offer in-house financial advisors, depending on who you bank with. They can offer advice ranging from personal goals, retirement & estate planning to legacy planning. Aligning your goals with sound advice is a great place to start your financial management journey, enabling you to grow your financial literacy.
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