This article is devoted to the idea of financial literacy. We will discuss why financial literacy is important, who to plan a budget, and which resources to read to enhance proficiency in the sphere.
Why financial literacy is important
Financial literacy is a set of knowledge and skills aimed at improving one’s welfare and life quality. It includes budget planning, working with banking products, pension savings, understanding of the work of financial instruments, and drafting a personal financial plan.
Financial literacy helps to formulate financial goals more clearly and reach them successfully. On the contrary, a lack of necessary knowledge may lead to unwise decisions that will compromise one’s general state of finance. Modern world has made loans more affordable, and an unprepared person may try to solve their problems that require additional money with loans. However, if they are not attentive enough with the final sum of the loan that might exceed the necessary sum many times, such a person risks ending up working for the credit interest in the end.
One bright example of where financial literacy is useful is income distribution. Wisely distributed income allows for making savings and avoiding debts. Life is full of ups and downs, and financial literacy helps us create a financial airbag to protect you from possible risks. Moreover, the habit of controlling your finance and banking accounts makes you less vulnerable to fraud.
How to plan a budget
A budget is a financial plan for a certain time that accounts for planned income and expenses. As a rule, budgets are planned for a year or a month. Planning a budget, you will need to write down a detailed list of your expenses that will show you what you can drop off to reach your financial goal faster. Roughly, creating a budget consists of several steps:
1. Calculate your income. Net income is the basics of any budget. Account for only the money you get on hand, minus taxes, pension contributions, and healthcare insurance.
2. Track your expenses. You need to understand what you spend your income for: communal payments, gasoline, entertainment, food, etc. Tracking you spending helps you to find unnecessary expenses.
3. Make goals. Goals include creation of a financial airbag sized 3-6 wages, car repairs, holidays, and pension. Your goals are to motivate you to spend less and stick to your budget.
4. Draft a plan. The simplest rule is 50/30/20, where 50% of your income are necessary expenses, 30% are unnecessary ones, and 20% are savings.
5. Correct your expenses. Avoid overspending to get closer to your goals. For example, food, dwelling, and gas are so essential that spending on them is most likely unable to be cut down on. However, streaming services, cafes, and shopping are entertainment that can be compromised for reaching your financial goals faster. Mind that even small savings provide for large saved sums in the future.
6. Revise your budget. After you have set your goals and have accounted for all sources of income and expenses, check you budget again to make sure you are sticking to the plan. You income and spending may change, but the main thing is to correct your budget in time.
Financial literacy and investments
While financial literacy helps you to save money by making a budget plan and writing down all of your income and expenses, investing helps you to make more money. Moreover, financial literacy in the sphere of investing will also save you from excessive risks and allow for strict planning. There is an idea that investing is what lets us reach long-term major goals through buying stocks, bonds, and other assets.
In the long run, average growth of the stock market amounts to 7% a year, inflation excluded. With such growth, cost of your investments doubles every 10 years and a half. However, there are risks as well because the economic situation that influences stock markets is prone to change with time. And due to the change, financial instruments in stock markets will demonstrate different yield. These days, there is a variety of investing options; your choice depends on your goals and opportunities as an investor. Here are the main investing options in the stock market:
- Independent trading. This is the easiest approach with minimum expenses. It presumes that you assess securities, buy and sell them on your own. It must be realised that analysis of financial performance of companies and tech analysis for finding an optimum entry point will take time.
- Copying trades of large investors. This option means that you base you trades in the investment portfolio of experienced investors. For example, the largest investment positions in Warren Buffett’s fund Berkshire Hathaway are taken by Apple, Bank of America, Coca-Cola, American Express, and Kraft Heinz Co.
- Working with a counselor. Some investors prefer working directly with a personal counselor that selects stocks according to the investor’s needs. However, such work requires more money, and commission fees will be much bigger than when working independently. This option might be suitable for those with a larger investment portfolio.
Financial literacy resources
Financial literacy resources are what can help you develop necessary skills and qualities. Today the Internet is full of various resources and projects meant for budget planning and accurate investments. Here are the largest of them.
The information provided on this finance resource is meant for making financial decisions easier even for beginners. Educational articles and publications are plentiful. Among users of this resource are complete beginners, owners of large businesses, and financial counselors of various levels. All of them aim at increasing their proficiency. This might be one of the best personal finance magazines on the Net.
The resource provides objective information from the world of finance and aims at helping its users to make weighted decisions. It provides information about credit cards, bank deposits, real estate, and much more. This is a great resource for financial planning, and the company was founded in 1976, beginning as a printed edition.
The goal of this financial magazine is to make the world of personal finance available for everyone. Daily news and publications with useful advice and money management recommendations will help to make your way through all aspects of financial life. The website holds over 10 thousand of articles written by 50 authors with academic degrees.
This is the largest investing community. The content of the resource is diverse, starting with the basics of stock and ETF investing and up to investing in gold and crypto. The editorial office claims that the website provides professional info, and the website’s algorithm for choosing the strongest stocks makes investing simpler. Those users who consider this one to be the best investing magazine might be right.
This financial education resource is worked on by a team of experts with a long-term experience in the sphere of personal finance. All information is aimed at making correct investing decisions and helps to choose those financial products that will satisfy your demands.
The Motley Fool
The website has been functioning since 1993. According to what its founders say, it helps millions of visitors to gain financial freedom. The site provides advice and recommendations, latest stock market news, manuals, and details of how to find and choose the best broker for you. This is a great investing magazine.
This is a financial resource meant for active Forex traders. Daily publications include a variety of news with market analysis, charts and currency exchange rates, the economic calendar. On the whole, the website provides for a lot of useful information for traders aimed at weighted decisions about buying and selling currencies.
Apart from saving money, financial literacy teaches you to react correctly to unplanned expenses and stay cool when your income changes – because you have a money airbag. Minimum savings in the long run help decrease your expenses noticeably. Some polls show that those who plan their budget and control spending save necessary sums faster, have no debts on their credit cards, and try to pay more than the minimal sum to pay off large loans as quickly as possible.