Financial literacy is the сompetency in the field of finance, personal savings, and ways to manage them.
In this article, we discuss the basics of financial literacy, which will help you become financially independent and manage your money competently.
Freelancers need to be financially literate.
In contrast to office colleagues, a freelancer does not have the same social protection and must worry about financial health himself.
It is also very important for students to be aware of the principles of financial literacy.
Being financially literate allows me to save for the future, travel, and buy term paper.
Basics of Financial Literacy for beginners
There are five rules, the use of which helps to achieve financial independence:
- Always spend less than you earn.
- Try to buy something that is becoming more expensive.
- Try not to buy something that is getting cheaper.
- First of all, meet the basic needs.
- Take into account not only the cost of the item but also the costs of its maintenance.
For example, it follows from these rules that first of all it is necessary to solve the problem with housing.
Without your real estate, it is difficult to create a family, survive in old age, etc.
It is extremely difficult to buy an apartment or a house because of high prices, so you need to get a living space first of all.
You need to buy a house that will become more expensive in the future.
On the contrary, it is necessary to spend money on buying a good car or traveling last of all, when the basic problems (housing, good education, health) are solved.
In the case of a car, it is necessary to look at the cost of operation, and not just the price of the car.
You can “do your best” and buy an expensive car – and go broke on its maintenance (CTP, CASCO, road tax, expensive spare parts and service, accessories, etc.).
How to Start Solving Financial Problems?
In addition to the basic rules, some additional rules and recommendations will help you become a financially literate person and avoid typical mistakes.
Below is the information that will allow you to start effectively managing your funds.
For convenience, we have made several blocks on each topic.
Is It Worth Taking Out Loans?
You can take out a loan in three cases:
- For housing.
- For the means of production.
- For treatment.
You can not take a loan for a car, entertainment, equipment (if it is not needed for work), clothing, etc.
Credit cards should be used as little as possible.
A new loan can be taken only after the payment of the previous one.
Apartment And a Car
The maximum cost of the car should be the amount of income for 12 months.
Such a car will be comfortable and will not become a financial burden.
Everything that is more expensive, you buy beyond your means.
The maximum cost of housing is the family income for 4 years.
Financial reserves
Any person needs to have some savings that can be spent in case of force majeure situations.
The minimum amount of reserves is income for 6 months.
The optimal one is the income for 1 year.
These savings will allow you to comfortably survive temporary difficulties or change your profession if necessary.
If you are planning to have a child, the number of reserves should be increased.
You will not be able to fully work for some time, while your expenses may significantly increase due to the addition to the family.
Typical Financial Mistakes
Financial literacy will help you avoid the typical mistakes that people make.
You will be protected from unbearable loans and think about how to repay debts.
Below we have collected popular mistakes that people with personal finances make:
I Spend Everything!
You spend everything you earn.
Reserves are not formed.
The solution to housing problems occurs with the attraction of the maximum loan, which increases the cost of interest and reduces the standard of living.
I Want to Buy It!
You often buy on emotions and then do not use the purchased things.
Many purchases are made with the involvement of loans, including consumer loans with the highest interest rate.
You do not work for yourself, but the banks.
I Want the Best, But I Don’t Need Another One
You want to buy an expensive car, without considering buying a budget one.
You need a 3-room apartment right away, and a 1-room apartment does not suit you.
You always want to buy something that is not currently available and does not buy something that you can afford. Further events can follow two options:
You Buy What You Want, but by Credit Card, and This Loan Ruins You.
You postpone purchases for later, and as a result, you live worse than you could (you do not buy your own, albeit small, apartment and live with roommates).
I Won’t Live to See Retirement
You do not form reserves, because you think that you are far from retirement or you will not live to retirement anyway.
The problem causes moving to an extremely low standard of living in old age.
How to Improve Financial Literacy?
Analyze your income and expenses.
Check what expenses you can avoid and, accordingly, how much you can save.
You need to optimize all expenses, including small ones.
Use apps to record income and expenses.
For example, a very convenient and functional program “Mint” helps to conveniently analyze all income and expenses.
Follow the rules from the article described in the section about the basics of financial literacy for beginners.
Save money and learn how to invest it.
To complement bank deposits, you can invest money in bonds, real estate, your business.
Use your loans carefully.
Try to pay off your debts quickly and live within your means.
Summary: Why Do You Need Financial Literacy?
Financial education and the ability to manage personal funds will allow you to accumulate wealth and gradually increase your financial capabilities.
You will not need to take out large loans to buy the necessary things.
It will be easier for you to solve problems such as buying a car and real estate.
As a result, you will become calm and more confident in life, you will worry less about tomorrow.
Improving financial literacy is an ongoing process.
Therefore, read useful books, study the world of finance, use various opportunities to increase personal funds.
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