Financial literacy is the key to effective financial planning and management. To know how it can turn the tables in your financial favour, check out this article!
Today, we all wish to save and invest as much as we can- all in pursuit of financial well being.
All of us have witnessed financial turmoil on another scale due to the pandemic and the ongoing war.
Such times have made us realise that no job is a secured job.
This can be understood from the sample of sudden lay-offs by many reputed companies.
All this leaves us with a slippery slope of financial management.
No doubt, one thing that you must do in order to provide yourself with a financially stable future is- look for more than one source of income and make sure to save and invest actively.
Well, this may be seen as the complete solution, which it is, but the problem arises when you don’t successfully understand the meaning behind these magical terms.
Ask yourself and answer honestly- Do you exactly know what investment means? Do you understand budgeting? If you’re unsure of the answers, then it’s time to learn them!
But you need not worry, we are here to help you get going with your financial management. Let’s begin your financial journey by understanding the meaning and importance of financial literacy:
1. What is Financial Literacy?
Financial literacy simply signifies your awareness regarding concepts and skills like saving, investment, budgeting, borrowing, taxation, etc.
The need for being financially literate is that it prepares you for any sudden financial roadblock.
In addition, you will find it much easier to get away from personal financial distress.
At every stage of life, you will come across such financial terms- be it student loan, mortgages or a simple life insurance plan.
You wouldn’t want to be in a situation where a mere lack of knowledge regarding a term ruins your whole financial plan.
People who are not financially literate find it tough to make big investment decisions. Financial illiteracy negatively affects your financial discipline and capacity.
The significant financial lifestyle changes that you could’ve brought about to improve your financial health cease to exist if you are financially illiterate.
This will directly impact your regular saving, investing and money management habits and help you to avoid financial crisis.
2. Merits of being Financially Literate:
- If you are financially savvy, you will definitely make more precise and informed financial decisions for not just yourself but also inspire others to do so.
- Money management? The better your financial literacy, the more polished your money management.
- While you may have debt even if you're financially literate, you will still feel more at ease getting rid of it than people who are financially illiterate.
- Since financial literacy leads to effective planning and financial management, you are more likely to succeed in your financial goals.
- A better understanding of your income helps you manage your budget efficiently. You will find it easier to maintain control over your expenses and savings.
- A well-structured budget is what you can at least expect from financial literacy.
- You will definitely be more inclined to make ethical decisions while taking a loan, insurance or just simply using a credit card since these terms are a typical nightmare for any financially illiterate person.
- Needless to mention, you will face less stress and anxiety regarding your finances since financial literacy makes you financially savvy.
Therefore, if you are aware that you are struggling, it's never too late to start learning!
Let’s take a look at some crucial components of financial literacy that you must know especially if you are a newbie.
3. Fundamental components of Financial Literacy:
Financial literacy is one of those things that can never be skipped. They essentially are the stepping stones of this journey and basically form the bedrock of the whole financial literacy movement.
In order to get a better idea regarding the control and management of your money, you must get an insight of these skills and components:
Budgeting- spending & saving
Budgeting is the first and the most crucial step when starting money management.
Before you start saving or investing, the effective management of your expenses is essential.
Your spending pattern will determine your initial financial goals, so you must keep track of them.
As you advance, you will find yourself at ease while keeping track of costs, cutting down on excess spending, and managing your money in a better way.
Once you develop these healthy financial habits, your well-executable financial plan will knock right at your door!
The key to a brighter financial future is effective investments.
Instead of just making your money sit in a locker or bank account, you can invest it in various financial instruments.
This will create your financial portfolio and expand your income sources.
Through effective planning and management of your financial portfolio through various tools, you will be able to lead a secure and happy life.
You may consider investing in gold, mutual funds, or any other financial product to create wealth.
Especially if you wish to have a worry free life after retirement, investing should be your prime focus and, with that, saving too.
Borrowing & Debt
Both borrowing and debt seem like a negative element of financial literacy. Therefore, it is critical to understand these terms.
First you must know the rationale behind a good debt and a bad debt.
In simple words, the borrowings that you take to sustain your life or carry out a successful investment are considered "good debt."
Whereas, the one that takes down your finances, messes up your budgets, makes you lose your assets and basically makes it impossible to cope up with are all bad debts.
This ability to distinguish between necessary and superfluous spending will assist you in keeping away from debt.
Knowledge regarding taxes is crucial even if you aren’t a big earner. As a responsible citizen, you're required to pay your taxes regularly.
If you earn a high income, no doubt you will be paying income tax.
In the case of small earnings, you may not have to pay this direct tax, but you will eventually always pay the indirect taxes like GST.
Even if you consider investing, taxes will play a huge role since there are some investments like NPA where your profit will not be taxed, and in some other investments, you will have to pay tax on your capital gains.
Whatever the situation is, you must be aware of the tax regime and plan your finances accordingly.
These were the components that carry with them the essence of financial literacy.
Make sure you get a thorough insight into them before moving further in your financial journey.
Financial literacy instils necessary skills and information in you in order to help you cope with adverse circumstances efficiently.
In order to avoid a shaky base while managing your finances, proper financial knowledge is your saviour.
Lastly, for your successful financial growth, you must be aware of the key concepts and techniques of financial management.
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