Basic financial literacy: Teaching you personal finance in 10 minutes

Finance, a seven-lettered word is so vast that even its basic understanding weighs a lot. 

It is certainly not about getting rich overnight as in this realm, things take time. 

So, if you are here with this point of view then this article is not for you.

Instead, basic financial literacy is all about changing your perception only. Perception about money actually includes the perception of lifestyle, friends, family, love, emotions, and society; in short, it is about the perception of life itself. 

The goal of financial literacy is to assist people in better understanding financial concepts that will allow them to manage their money more effectively. It is a life skill that everyone should learn if they want to be financially secure. 

In layman's language what we understand as finance is the overall management of money. Savings, investing, borrowing, lending, budgeting, and forecasting are all examples of financial activities. Personal finance, corporate finance, and public finance are the three major categories of finance. 

Here we are concerned with personal finance which is about Banking, the purchase of financial products such as credit cards, loans, and insurance, among other things. Changing your mindset about money is the core value of financial literacy because bigger things take place on the surface of the mind before they get demonstrated in reality. 

How to change your perception of money

Contrary to popular belief, finishing rich isn't always determined by the size of your paycheck — and it has more to do with psychology and mindset than you might think. This should come as good news to you because anyone can change their thoughts, beliefs, and habits to reflect those of the wealthy. Begin by considering money as an investment rather than something to save or spend. 

What is financial literacy in broad terms? 

Basic financial skills include budgeting, investing, credit management, and financial management. Financial literacy, in other words, is the ability to manage money. A solid foundation of these financial skills will aid in the achievement of various life goals such as retirement, education, and even taking a vacation.  

Financial literacy encompasses a wide range of abilities. However, the most popular are budgeting, expense management, debt repayment, and understanding the risk-reward trade-off in investment products. Acquiring these skills would necessitate an understanding of fundamental financial concepts such as the time value of money, compound interest, annualized return, and opportunity cost. 

With so many credit products available, such as credit card debt, bank overdrafts on card payments, and EMI, economic literacy is critical. Individuals who recognize debt and have basic financial awareness will be able to responsibly use these products.

Financial literacy frequently teaches people how to make major financial decisions. Furthermore, it improves financial discipline and capability. This will result in significant lifestyle changes such as regular saving and investing, effective debt management, and efficient achievement of life goals. Furthermore, financial literacy will protect individuals from financial fraud and ensure their financial well-being.

Some common and useful hacks to be financially aware

Start with emergency funds 

This one is the most fundamental out of all. The amount of savings you require is highly personal, and it is commonly measured in months of living expenses rather than a fixed amount. Many experts, including multi-millionaire  John Paul DeJoria, believe that having six months' worth of savings is prudent. Depending on your circumstances, you may require more or less. To get a rough understanding of the monetary amount you should be aiming for, start by calculating how much you expend each month and multiplying it by the number of months you feel more comfortable putting money aside for an emergency.

Track your money wisely 

You must understand that where does your money go? 

Most of us know how much money goes into our bank accounts each month, but how much goes out? 

Do you know how much money you spend on eating out, monthly subscriptions, or coffee? There's a good chance it's more than you think. Because of the power of compound interest, rerouting small, everyday expenses into a retirement account can collect and even grow into six or seven figures over time. 

How to make saving your routine

Believe it or not, having enough money to save is often a matter of mindset rather than dollars. "When most people earn a dollar, the first thing they do is pay everyone else," Bach writes in "The Automatic Millionaire." "They pay their landlord, their credit card company, their phone company, the government, and so on." They believe they require a budget to assist them in determining how much to pay everyone else so that at the end of the month — of the year — or their working life, they will have something 'left over to pay themselves.

The perception of your partner matters 

If you are in a relationship, then this is for you!

Money conversations, as uncomfortable as they may be, are essential — especially if you're thinking about proposing. After all, financial disagreements are a leading predictor of divorce.

In his book "Smart Couples Finish Rich," financial adviser David Bach writes, "Smart couples talk about money all the time." "When you collaborate on your finances, the results can be amplified. If you don't, the same can be said for the mistakes you'll undoubtedly make."

After these four important life hacks for achieving financial literacy, there are four main pillars of financial literacy and they are very important and must be well understood. 

  • Budgeting 

Budgeting is an important life skill that aids in the acquisition of financial knowledge for the purposes of planning and managing money. It is one of the most crucial aspects of financial literacy. It is essential to keep track of one's spending habits. Effective money management will aid in the development of a workable financial plan. The actionable plan will assist in tracking expenses, separating unnecessary ones, and spending money wisely. This way, more money can be saved. The general rule for financial planning is that income must exceed expenses. The distinction between the 2 (costs and revenues) is what aids in the accumulation of savings. 

Budgeting aids in the planning of short-term, medium-term, and long-term expenses. It enables people to save appropriately. As a result, there is no need to find common ground on any of one's objectives. Budgeting is thus critical for economic freedom and independence. 

  • Debt

Debt is nothing more than borrowing. One is spending money that does not belong to them. For example, if a person borrows money from a bank, uses a credit card, or takes out a short-term loan. All of this is added to the debt.

Debt is generally regarded negatively. As a result, understanding debt is critical. However, not everyone can afford to buy a house, a car, or pay tuition in cash. Borrowing or taking out a loan is the only way out in such situations. The most important thing, however, is to distinguish between good and bad debt. Furthermore, it is always preferable to avoid bad debt as much as possible. These are the fundamentals of debt management.  Borrowing money for things that are important for making a living is considered good debt. For example, purchasing a home or paying for education. Bad debt, on the other hand, is borrowing money for unneeded expenses. Using a credit card to purchase expensive clothing or electronic devices, for example. As a result, being able to distinguish between needed and unnecessary spending will keep a person from drowning in debt.

  • Saving 

Saving ensures financial well-being, a secure present, and a bright future. Long-term wealth can be built through careful financial planning. Keeping track of one's spending habits can help one save money. As a result, by saving, one can easily achieve the following:

Achieve important financial objectives. For example, full repayment of a home loan, education for children, and retirement savings. Set up an emergency fund. An emergency fund serves as a safety net in the event of an unexpected life event. The fund should hold at least six months of one's earnings. Instill financial responsibility. Saving money on a regular basis allows one to develop financial discipline and excel in life.

  • Investing

Instead of letting money sit in a bank account, it can be invested in financial instruments. Investing is all about creating and growing wealth so that you can have a happy and secure future. It all boils down to putting money into a strategy that will help generate significant returns over time. Investments will aid in the generation of additional monthly income as well as significant returns. One can also accomplish their financial goal while allocating funds to retirement savings. Equities, debt instruments, unit trust, real estate, and gold are some popular investment options. 

To cut a long story short, It is important to develop financial literacy skills. It aids in the improvement of personal financial management. Personal finance is a process that entails the acquisition, practice, and application of a wide range of financial skills. Budgeting, management, debt repayment, credit understanding, and various investment products are all covered. As a result, becoming financially literate will aid in:

  • Creating wealth
  • Self-defense in the event of an emergency
  • Obtaining objectives
  • Providing for one's family's future
  • Retirement preparation
  • Maintain a stress-free lifestyle.

In the end, life is full of problems, but if you have got your personal finances managed, then going broke won't be one of the problems that you'll be facing!

Thanks for Reading!

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