Investopedia defines financial literacy as “the ability to understand and effectively apply various financial skills, including personal financial management, budgeting, and investing.” Financial literacy is being aware of how one handles their finances so they don’t end up in debt.
Like every other topic that involves money, learning about financial management is required. It includes investments, savings, banks, interests, debit, and credit, etc. All of which have their own set of rules. However, there are simple ways that can make money management a little bit easier.
Beware of credit
We’ve seen it in countless movies. In Confessions of a Shopaholic (2009), the protagonist borrows money from a stranger and uses multiple cards to buy a scarf. Now she’s got a new scarf and a pile of credit card bills with no means to pay them off.
Because credit cards are addicting, marketed as fancy, and leave the user unaware of their expenditures until the end of the month, it’s easy to fall off the rabbit hole. In 2018, an average consumer had $6,345 in credit card debt.
Weighing the pros and cons of buying an object can help in saving money. Is it a necessity? Why are you buying it? How much value can you get from it?
Set a monthly budget
A monthly budget will help a person keep track of their expenses and prevents them from overspending. Every paycheck, a person should set aside specific amounts of money for bills, rent, basic needs, leisure, etc.
A monthly budget forces people to limit themselves and take an extra step to track their expenses. A convenient way to do this is by using smartphone money tracker apps. Having a visual record of how much money they’ve been spending will help them become aware of how much money they have left, where their money is going, and where they can add changes for the next month’s budget.
While setting a monthly budget, expenses should be less than earnings. This way, savings are guaranteed. Savings are useful for a lot of ways:
- Buffer fund for emergencies,
- For something big like a car or a house,
- For future use (e.g., investments).
Changes in one’s habits can already help them save. For example, giving up a $5 coffee or sandwich for one day a week can give you an extra $20 a month. Cooking your food at home can also save you five times the amount of having food delivered at home.
Learn about investment options
Stocks, bonds, real estate, etc.—these are all opportunities to earn money. For example, one investment where a person can make passive income is through DST 1031, as this allows them to own properties and collect from tenants without the responsibilities of a landlord. No matter how wealthy a person is, but if they’re not well-aware of the investments that are available to them and the ones they make, it can always go south.
As appealing as wealth is, not everyone has this kind of luxury. Therefore, responsible financial management will keep a person from being in debt and spending way more than the money they have.