Financial literacy is critical to financial success. As the economy continues to evolve, it becomes increasingly important for everyone to understand how money works, what investments do, and how to manage personal finances.
A lack of understanding of basic concepts concerning financial literacy can lead people to make poor investing decisions, jeopardize their savings, and miss opportunities.
This guide will explore 4 common concepts that make a person financially literate.
But before getting into the concepts, let’s learn financial literacy.
What Is Financial Literacy?
Financial literacy is the tendency to make financially sound choices. From spending cash on a plate of rice to purchasing a mansion, financial literacy will help you make well-informed decisions to enhance your lifestyle. These choices include how to pay down debt, plan for emergencies, save money, and more.
A lack of financial literacy affects everyone, regardless of socioeconomic status or level of education. Consumers without financial literacy often struggle to make wise spending choices, leading to increased debt, inflated costs, and poor savings habits.
In fact, there have been studies where most people are unaware of how much they owe on their mortgage and credit cards. This lack of awareness leads people to spend more than they earn, putting themselves deeper into debt.
Let’s now look at common some common financial literacy concepts.
Common Financial Literacy Concepts
Financial Health
Financial health is your current monetary state. It includes components such as your credit history, the debt you owe, the savings you have made, your investments, and income generated from your investments. The core goal is to make better your financial health.
According to financial experts, you can improve your financial health by:
- Spending less than you make. Don’t live beyond your means.
- Do your best to avoid the debt; otherwise, they will break your bank in the long term.
- Save anything beyond your monthly expenses.
- Don’t just save, but invest your savings into assets that can generate passive income. Check my guide on the four best passive income sources.
- Lastly, fulfill your dreams from the revenue generated from your investments.
Taxes
Taxes are one of the most notorious parts of life that everyone needs to avoid. In fact, avoidance of taxes is one such topic that is searched 129,900 times every month in multiple variations in the United States alone.
There are two concepts that you need to understand related to taxes. One is tax evasion, and the other is tax avoidance.
Tax evasion is illegal. It is hiding from your tax obligations. If you get caught committing it, you can have serious legal consequences. So, the ideal thing is to stay tax compliant.
However, there are certain loopholes in tax laws that you can use to your advantage. That is the concept dictated by tax avoidance. Tax avoidance is the legal way to pay less in taxes using tax provisions under the guidance of a tax practitioner.
If you want to make more and pay less in taxes, you got to become a business owner—most of the benefits available in the tax laws are for business owners. I can’t state tax laws in this guide because they are country-specific. You can get advice from a reputable local tax consultant who can help you save taxes.
The Debt
To become financially literate, you must use the debt for your benefit.
However, the debt cycle for most people looks like this:
- Get into a contract with a financial institution.
- Obtain the loan.
- Purchase an asset such as a house.
- Keep paying installments for years to come.
The best thing you can do with debt is, don’t get a debt. However, if you’ve already obtained it, you can adopt some best practices to avoid the debt’s evils.
One such best practice is:
Paying off the debt with the most interest rate first because not paying it on a timely basis can significantly increase the debt over time following the compound interest principle.
Have A Budget Plan
One of the ways to stay away from financial troubles is to prepare a budget plan. The centric idea behind a budget plan is to track income and expenses and save and invest whatever remains.
To prepare a realistic budget plan, this is what you need to include in it:
- Your fixed costs that will incur no matter what, like rent expense.
- What are the unnecessary costs you made last month? Try not to make it this month and mark them in saving goals.
- Your monthly income.
- Emergency fund. In other words, save for a rainy day.
- Savings from the last month.
Conclusion
While it may seem like extra work, following these essential financial literacy concepts can tremendously affect your life. Becoming a financially literate person will take you ahead early in life compared to your peers, and you will achieve more in life than others.