Budgeting, banking, credit, savings, investing and debt are a few pillars that help in supporting the financial decisions of your life. However, you do need to learn some of the basics of finances and have the skills that will help you become more financially secure. Financial literacy is important in order to improve your life. By the term, financial literacy we mean the use of financial skills that can help you understand and manage your finances better. If you are more financially literate, then you spend less and have an emergency fund with a retirement account. Financial literacy is the practical application of everyday life like budgeting, banking, handling credit and debit and investing.
Financial literacy and its importance
The ability to understand and utilize financial skills like budgeting, personal financial management and investing is financial literacy. It means comprehending a few financial concepts and principles like compound interest, time value of money, financial planning and managing debt. Financial literacy can help you make the right decisions for your finances and become self-sufficient to achieve stability. With financial literacy, you can track spending, create a budget, plan for retirement and pay off debt.
With financial literacy, you learn how to achieve your financial goals and how money works. You become more aware of discriminatory and unethical financial practices and can manage any kind of monetary challenges life throws at you.
As per the Financial Industry Regulatory Authority (FINRA), Americans who have a higher level of financial literacy spend less can create a 3-month emergency fund, have a retirement account and are more likely to make ends meet.
Earlier workers used to depend on pension plans to fund retirement, but now as few workers get pensions, employees need to educate themselves and choose financial literacy to make smart investment choices. Adding to all these, the increased life spans that lead to long retirements don’t support basic survival. With complicated health and insurance schemes, savings can get more complex down the line.
Financial literacy is more important than ever to make informed and thoughtful decisions. You also avoid unnecessary debt and help family members in complex situations by having adequate income for their retirement years.
How to create your budget?
You can create your budget to control your savings, spending and investing. You can improve your financial health by checking where the money is going and tracking expenses against income. A proper budget template can help people reach their goals and manage money by saving for retirement and other emergencies as per the 50/20/30 budget rule. This budget rule signifies that you spend 50% on your needs, 20% on what you save and 30% spend on wants.
Budgeting starts tracking how much money you spend and receive every month. You can track that on a budgeting app, excel sheet or paper. However, when you decide to track there are a few things that you should make a note of:
Income: The money that you receive every month. This includes investment income, paychecks, settlements, alimony and money that one makes from side jobs and additional projects like selling crafts.
Expenses: Your purchase list for every month. Split them into two: discretionary expenses and fixed expenses. Review the credit card and bank statements and brokerage account statements to ensure everything is captured. Fixed expenses are purchases which you must make every month. The amount doesn’t change and is essential. These include mortgage/rent payments, loan payments and additional utilities. Discretionary spending is non-essential expenses like shopping, travel, and restaurant meals. These are wants rather than needs.
Savings: You should record the amount of money you save every month – it might be cash deposited to the bank every month or monthly investment money added to your retirement account.
By subtracting the expenses from the income, you can get a clear idea of how much money you get to save every month. You then get a perfect picture of money coming in, going out and money saved. This will help you to recognize the expenses you need to cut back upon.
It is important to have some money saved as emergency funds as you can utilize this money in cases of emergencies like job loss or whatever. This money shouldn’t be used for discretionary spending. It is important to keep these savings growing and safe for tough times when income level stops or decreases.
How to start investing money?
You need to know the basics of how and where to invest the money. You need to understand the risks and potential rewards of the various kinds of investments.
Investing in stocks: Also known as shares and equity, this kind of investment signifies partial ownership of the issuing company and the stockholder is entitled to a proportion of the company’s earnings and assets.
By owning stocks, you receive dividends, have the right to vote in shareholder meetings and even sell your shares to someone else. The cost of a stock starts to fluctuate and depends on various factors like the domestic economy, the company’s performance, the day’s news, the global economy, and more. Stocks can fall or rise in value and also become worthless, which makes them volatile.
ETFs: Exchange-traded funds are a collection of securities like stocks. ETFs use various strategies and can be invested across any number of sectors. When you buy an ETF, you get to buy a slice of the pie with silver of the securities within. This helps you purchase a variety of stocks with the convenience and ease of only a single purchase and that is the ETF.
Investing in an ETF is less risky than stocks as they have many securities inside and if some fall in value, others rise in value.
Mutual Fund: Investment with a portfolio of bonds, stocks and other securities is what mutual fund stands for. They provide small and individual investors access to professionally managed portfolios that are diversified and come at a low price.
There are several kinds of mutual funds with different types of securities in which people invest have investment objectives and there are specific returns that they seek. Many employer-sponsored retirement plans offer investment in mutual funds.
However, mutual funds do charge annual fees which are expense ratios and in many cases commissions.
Financial literacy is a huge concept and, in this article, we have just started educating about certain aspects. If you are ready to learn more, then stay tuned to this page for more such updates.