Key aspects of financial literacy include:
- Budgeting: Creating and sticking to a budget to manage income and expenses effectively.
- Saving and investing: Building an emergency fund, saving for long-term goals, and investing wisely.
- Debt management: Understanding different types of debt, managing credit responsibly, and paying off debt strategically.
- Risk management: Assessing risks and protecting assets through insurance and other strategies.
Importance of financial literacy
Financial literacy is extremely crucial. It equips you with the skill set to take charge of your finances, make fiscally responsible decisions, save money at all times, and manage loans or debt well. These are just some applications of financial literacy; it impacts your day-to-day decisions without you even realising it.
For instance, let us say you have Rs. 100 to spend for the day. Now, based on your activities and travel planned for the day, how will you decide to spend it? What expenses that are taking up a majority of your spending can be avoided? This simple money management is also a part of financial literacy.
Components of financial literacy
Financial literacy has five key components. It teaches you about spending, saving, earning, protecting wealth, and borrowing.
- Spending - Getting a good value and knowing when and how much to spend.
- Saving - It is never too late or never too early to start saving and investing your wealth. With proper guidance and education, you can safely invest towards your future goals.
- Earning - Break down your earnings and understand the benefits and perks you get as an employee to make the most of your income. Additionally, always strive for growth and explore your earning potential.
- Protecting - Know how to protect your wealth, where to keep your savings, which platforms and mediums to trust, and always be prepared for emergencies.
- Borrowing - If you need to take up a loan or borrow money, plan repayments, check interest rates, and manage budgets accordingly. Be well-planned and prepared for such situations.
Advantages of being financially literate
There are many advantages to financial literacy because it is a skill you acquire for your growth. A few benefits are highlighted below:
- Ability to make smart and sound financial decisions.
- Ability to create and maintain your budget sheets.
- Expense control and minimisation.
- Reduction in stress and financial pressure due to well-planned finances.
- Profits and growth due to smart financial investments.
- Effective management of loans, debt, and emergencies.
How to gain financial literacy?
There are multiple ways in which you can attain financial literacy. Whether you take help from an expert or try to acquire certain skill sets independently, even a small first step is enough to become financially secure and independent over time.
1. Learn budgeting
This is the first step towards financial literacy. Knowing how to manage your salary or monthly income is one way to understand budgeting. This enables you to plan your monthly expenditures and be prepared for any emergency. Additionally, you would know how to use any extra income and attempt monthly savings. Whether you do so for your vacations or investments is up to you.
2. Open a savings account
Opening a savings account is a great way to protect your money. The bank will pay interest on your wealth and grant you a portable ATM card that makes your day-to-day spending easier. Banks also provide additional services such as security, fixed deposit options, and insurance schemes.
3. Understand debt and loan management
Debt and loans are an inevitable part of our lives, dictating our financial decisions when it comes to repayment. It is important to plan based on the number of loans you have, their interest rates, and repayment timelines. You should prioritise paying off loans with higher interest rates first. Additionally, if possible, it is advisable to pay off high-amount loans first to comfortably manage the smaller ones later on. However, this strategy entirely depends on your financial capacity. This planning is essential for financial literacy.
4. Know your credit score
Paying off credit card bills and loans on time helps you improve or maintain a good credit score. In simple terms, this is like a report card of your financial literacy as an adult. Your future loans depend on your credit history, as banks trust your timely repayment capabilities if you have a good credit score.
5. Secure and plan for your future
You cannot plan for your future without having a retirement plan. It is never too early or too late to secure your future. Adulthood gives you an adequate idea of your monthly expenses. Taking that into consideration, you can predict your post-retirement expenditures and create your plan.
6. Learn the basics of investing
Whether you are planning your current expenses or future ones, investments are always a smart way to utilise your wealth and make long-term profits. Even if you do not wish to—or are unable to make major investments, you can invest in popular investment vehicles like mutual funds, fixed deposits, and digital gold.
7. Understand risk management
In times of emergencies, it is your health insurance and other life covers that protect you from financial drains. Planning for such situations and investing in such covers come under risk management and financial literacy.
Strategies to improve financial literacy skills
Developing financial literacy involves learning and practicing skills like budgeting, managing debt, and investing. It also means understanding how to use credit and investment products wisely. Regardless of your current financial situation, it's never too late to start building good financial habits.
Conclusion
The skills you acquire by becoming financially literate are priceless. It is crucial to not rely on anyone else regarding your finances because only you can judge your investments and strategies. Additionally, preparing for your retirement or future should not solely depend on pensions.
Now that you know how to gain financial literacy, you can explore your full financial potential. Whether you stick to the basics or take more advanced steps, every bit of knowledge here counts.
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