What is financial literacy and how to improve it guide, Online financially independent advice
What is financial literacy and how to improve it?
25 Nov 2021
Financial literacy is a level of knowledge about finances, personal savings and how to manage them. In this article we will talk about the basics of financial literacy, which will help you to become financially independent and manage your money competently.
Freelancers in particular need to be financially literate. Unlike office colleagues, a freelancer does not have the same social security and must worry about their own financial health. I’ve noticed that many people don’t even know what routing numbers are (example pnc routing numbers).
Financial Literacy Basics for Beginners
There are five rules to follow that will allow you to achieve financial independence:
- Always spend less than you earn.
- Try to buy things that get more expensive.
- Try not to buy things that get cheaper.
- Meet basic needs first.
- Take into account not only the cost of things, but also the cost of maintaining them.
For example, it follows from these rules that you need to address the problem of housing in the first place. Without your own property, it is difficult to create a family, to survive in old age, etc. It is extremely difficult to buy an apartment or house because of high prices, so it is necessary to get an apartment in the first place.
You need to buy a house that will be more expensive in the future. Make a repair – the one that will help you to sell your apartment as quickly and as expensively as possible. So do not make designer repairs, if you do not intend to live in this apartment for a long time – when selling the designer repairs will not pay off and can even complicate the realization of the apartment.
Spending money to buy an expensive car or travel is necessary in the last place, when the basic problems (housing, good education, health) are solved. In the case of a car, you need to look at the cost of operation, not just the price of the car. You can “squeeze” yourself out and buy an expensive car – and go bankrupt on its maintenance (MTPL, hull insurance, road tax, expensive parts and service, accessories, etc.).
Where to begin to deal with financial problems?
In addition to the basic rules, there are additional rules and guidelines to help you become financially literate and avoid making typical mistakes. Below is information that will allow you to start managing your personal funds effectively. For your convenience, we have made several blocks on each topic.
Should I take out a loan?
There are three ways to get a loan:
- For housing.
- For means of production.
- For medical treatment.
You should not take out a loan for a car, entertainment, technology ( unless you need it for your job), clothing, etc. Credit cards should be used with extreme caution or not at all. You can take out a new mortgage only after the previous one has been paid off. You are not allowed to take two or three or more loans at the same time.
Cost of apartment and car
The maximum value of the car must be the size of your income for 12 months. If you earn $5,000 a month, the maximum value of the car will be $60,000. Such a car will be comfortable to maintain and will not be a financial burden. Anything more expensive, you are buying beyond your means.
The maximum cost is the family income for 4 years. For example, if you and your spouse make $5,000 each, your combined income will be $10,000 per month. The income over 4 years will be at $360,000. For this money you can buy a nice apartment (the price depends on the region in which you live).
Anyone needs to have reserves that can be spent in case of force majeure.
The minimum amount of reserves – the income for 6 months.
Optimal – the income for 1 year.
This amount of reserves will allow you to comfortably survive temporary difficulties or change your profession if necessary.
If you plan to have a child, the size of the reserves should be increased. You won’t be able to work at full capacity for a while, while your expenses may increase significantly due to the addition to the family.
Typical Financial Mistakes
The basics of financial literacy will help you avoid the typical mistakes people make. You won’t suffer from large loans and wondering how to pay back your debts. Below we’ve compiled popular mistakes people make with their personal finances:
Spending it all!
You spend everything you earn. Reserves are not being built up. Solving housing problems happens by taking out a loan. This increases interest costs and lowers the standard of living.
If I want to buy, I will buy!
You often buy on emotion and then don’t use the things you buy. Many purchases are made by taking out loans, including the highest-interest consumer loans. You do not work for yourself, but for the banks.
I want the best, and do not need the other.
You want to buy a cool car as a matter of principle, without considering buying a cheaper car. You want a 3-bedroom apartment right away, and you are not satisfied with a 1-bedroom apartment. You always want to buy what is not currently available, and do not buy what you can realistically afford. Further events can go two ways:
You buy what you want, but on credit, and that credit ruins you.
You put off purchases for later, and as a result you live worse than you could (you do not buy your own apartment, however small, and live with your parents).
I won’t live to see retirement.
You do not form reserves, because you believe that retirement is still a long way off. The problem causes one to move to an extremely low standard of living in old age.
How can you improve financial literacy?
Analyze your income and expenses. See how much you can avoid and how much you can save. You should optimize all expenses, including small ones.
Use special programs for recording incomes and expenses. For example, a very convenient and functional program “Home Accounting” helps to analyze all of your income and expenses.
Follow the rules from the article described in the block about the basics of financial literacy for beginners.
Save money and learn how to invest it. In addition to bank deposits, you can invest in bonds, real estate, and your business.
Use credit carefully. Try to pay your debts quickly and live within your means.
Summary: Why do You need financial literacy?
Knowing your finances and being able to manage your personal funds will allow you to accumulate money and gradually increase your financial capacity. You won’t need to take out large loans to buy the things you need. It will be easier for you to solve problems such as buying a car and real estate. You will become calmer and more confident in life, and you will worry less about tomorrow.
Improving financial literacy is an ongoing process. Therefore, read useful books, study the world of finance, and take advantage of various opportunities to multiply personal funds.
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