To many, the world of finance is incredibly intimidating; filled with complex terms and concepts not intended to be understood by mere mortals. This, thankfully, is a misconception. Financial literacy is well within the reach of anyone of any level of education.
What is financial literacy?
Financial literacy is having a basic grasp of money matters and its four fundamental pillars: debt, budgeting, saving, and investing. It’s understanding how to build wealth throughout one’s life by leveraging the power of these pillars. Put very simply, financial literacy is the difference between living from pay check to pay check, and being able to afford the things you want and need, to building wealth that works for you, which is why financial literacy is so important.
Debt is money you spend that isn’t yours. If you borrow money from the bank, use a credit card, or take out a short-term loan, you are accumulating debt.
While debt is viewed negatively, for most people, it is necessary because only the extraordinarily wealthy can afford to pay for a house, car, or education with cash. The first lesson here, is to understand the difference between good debt and bad debt and to avoid bad debt as far as possible.
Good debt is considered money borrowed for things that are absolutely necessary for making a life e.g. a house and for advancing your money-making potential e.g. an education.
Bad debt is considered borrowing money or using a credit card to pay for things you don’t need, such as expensive clothes, hi-tech electronics, eating out at restaurants, going on holidays, etc.
Saving is an essential part of financial wellness, a secure present, and a happy future. Wealth is built through spending less of your income so that you can achieve the following:
- Realise important goals, whether it’s to send your kids to university, fully paying off the loan on your home, and/or enjoying your retirement.
- Establish an emergency fund to cope with life’s curveballs, such as home or car repairs, illness, or unemployment. This should be about three to five months’ worth of income.
- Treat yourself every now and then to the things you really want, such as an overseas holiday or a new sound system.
Putting your savings into an interest-yielding bank account not only keeps your money safe, and out of temptation’s reach, but also allows you to grow it over time.
Budgeting is the life skill of planning and managing your money. By understanding exactly where your money goes every month, you are empowered to create an actionable plan by which you can spend less, by curtailing those unnecessary expenses and saving more for the things you need and want.
The rule here is that money coming in (your total income) should always be greater than money going out (your total expenses). The difference between the two values is what you should be stashing away as savings.
Budgeting helps you plan for short, medium, and long-term expenses, enabling you to save accordingly to afford all three. It is, therefore, entirely necessary for financial security and independence.
Investing is all about creating and growing the wealth you need to enjoy a financially secure and happy future. It’s about putting your money into something that will make you a profit over time, such as property, retirement funds, and unit trusts.
The growth of your investment’s value can establish a second, monthly income for you, or, if and when you sell it, you’ll have more money than you originally invested. The funds generated by your investments can then be used to see to your financial needs now and when you retire.
Become Financially Literate Today
Financial literacy enables you to:
- Build wealth
- Protect yourself in case of emergencies
- Achieve your goals
- Afford the things you really want
- Protect and care for your family
- Enjoy a happy retirement
- Live without money-stress
If you are currently a slave to your paycheck and have no savings to fall back on, it’s time to become financially literate. You can begin today with the Wonga Money Academy's fun, focused online videos and quizzes on debt, saving, budgeting, and investing. If you'd like to explore some other ideas, we also have a great list of free financial literacy resources.
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