What is financial literacy?

Financial literacy is a collection of financial information and skills that lets you make educated and fruitful financial decisions about your financial resources.

You are financially literate when you have the knowledge and awareness of financial topics that can help you achieve the lifestyle you want. Financial literacy involves your ability to effectively handle your money. You are financially literate when you can make the right personal finance choices like budgeting, insurance, investment, borrowing using loan apps, real estate, education, retirement plans, tax planning, etc.

It also includes understanding financial principles like compound interest, budgeting, profit-saving strategies, pre-approved loans, debt management, time value of money, etc.

What happens when you are financially illiterate?

Financial literacy is essential knowledge you must have. Not having proper financial literacy may lead you to make poor financial decisions. Such decisions can have an unfavorable influence on your financial well-being. However, after becoming financially literate, you get good with money.

Financial literacy is simple. As a financially literate person, you benefit from properly allocating your capital. However, neglecting the ideas of financial management can have adverse effects on your financial health. Some of the best ways to be more disciplined with your money need patience. Being disciplined about money takes a lot of patience and practice. 

Today, it is effortless to buy new things. There is a surplus of awesome things all available at your fingertips. The issue with the people of our generation is not to have enough of what one needs. The issue is the difficulty to choose what to buy without spending all the money on goods.

It is not healthy to overextend yourself and your finances to overcompensate your perceived shortcomings. You must know what your limit is and spend under it. When you understand how to manage your hard-earned money, it will stop slipping through your fingers. 

How can financial literacy help you?

Financial literacy goes a long way in improving your financial health. Below are some ways in which financial literacy can prove to be great for you.

Financial literacy can help you:

Choose the best option. Today, there are many financial options to choose from. You have plenty of investment avenues and many lenders such as banks offering pre-approved loans, NBFCs, loan apps, financial institutions, etc. You have many insurance companies and asset management firms that provide a variety of finance options. When you are financially literate, you can choose the best option rather than making a good guess.

Survive dynamic markets. Markets today are turbulent and ever-changing because of local and foreign participants, e-trading, technical improvements, etc. Such factors can give rise to contradicting perspectives in your mind as an investor. Financial literacy can help you get a clear picture of the dynamic markets and guide you on where to invest or switch investments by helping you avoid ambiguity.

Plan retirement. Saving and investing is a must for a good future. Your investing decisions now significantly impact your future. To gain a whole perspective of the types of funds you can invest in so that it doubles over time, you must first know how to make sense of the stock and money markets. Investing well will offer you a good return over a long time, helping you plan your retirement. Thinking of retirement may seem like a long shot now, but it is essential and supports you in your future. Financial literacy can help you plan your retirement.

Invest even in tough situations. Investing solutions of today are more sophisticated than what they were in earlier days. However, you have to pick from different product alternatives with various maturities and interest rates. You need to be financially literate to make such important decisions. Making correct decisions on complicated financial instruments is critical as they significantly impact your capacity to buy a house, save for retirement, or fund your kids’ college education.

Tips on how you can be financially free

If you want to become more disciplined, stop your savings from going down the drain, and have a greater chance at reaching your financial goals, read the following techniques and rules that can help you achieve financial freedom. 

  • Budgeting

Budgeting is telling your money where to go instead of giving them a free hand. So if you too are the kind of person who asks the same question—where my money went—at the end of every month, try budgeting. 

Budgeting involves setting aside cash for your regular monthly expenditures to know exactly where your money is going and whether the percentage of expenses made is in accordance with your income. You can then use the remaining cash for other things. Budgeting gives you a clear picture of your finances and helps you save. 

If you are learning about budgeting, you can not know about the 50:30:20 rule.

  • 50:30:20 budget rule

The 50:30:20 rule basically says that you must divide your income after tax into specific buckets:

  1. 50% of your income must go into fulfilling your needs. Your necessities such as food, clothing, rent, etc. constitute the need bucket
  2. 30% of your income must go towards satisfying your wants. You can save for your desires like a new house, a car, luxury holidays, etc. and put it in this bucket
  3. 20% of your income must go into savings and investments

The 50:30:20 budget rule is a golden rule designed to assist people in managing their finances and saving for retirement and emergencies. As your income increases, the amount you set aside for savings and investments would also increase.

  • Open up a savings account or a mutual fund SIP scheme to save a set amount every month

It is highly important to be disciplined to save money. Even when a savings account gives lower returns than stock investments, it is good to earn some interest while you save.

Whatever be your expenses, you can always save something. Even a tiny saving of ₹3000 a month can add up over time. While such a small amount may not make up the savings for your retirement, the chunk can still be a huge help in an emergency. To save and get to a particular amount you need to feel comfortable.

You can pretend the amount is just another monthly bill that needs to be paid to not feel tempted to spend it.

  • Set and stay focused on your financial goals

You become financially literate to achieve your financial goals. The first step is to figure out your financial goals. It is challenging to be disciplined about money when you do not have clear-cut goals for every stage of life. Set short-term, mid-term, and long-term goals for yourself. 

The next step is to stay focused on them, which is way more complicated. Life often does not go as you plan, and it can derail you from the path towards achieving your financial goals. So, you have to stay razor-focused on your goals.

  • Determine your needs and your wants

Setting up financial goals and tracking them is one thing. But staying on track to achieve them is another. Your needs vs. wants are your guiding light when things get tricky here. There can be various things that you may want. But such wants can throw you off of your path to reach important financial goals.

Keeping in mind your needs and wants can help you become disciplined about your money. So, if you have to spend on some of your needs, you can go ahead and do it. But if you are shelling out money to pay for something you want, you can hold off on your decision for at least a week to rethink and make a more thoughtful decision.

Conclusion

When you are financially literate and well-informed, you contribute to your economic stability by saving and making prudent investments. In addition, you can spot online financial frauds and avoid being a victim of them. 

The more financially literate you get, the better decisions you make with your finances. If you have more money, you are more effective in managing that. Keep in mind that you can have one of the best-paying jobs in the world but still be broke if you are not good at managing money. Financial literacy can set you financially free.