Financial Literacy: Learn the Basics to Improve Your Financial Decisions

It’s no secret that financial literacy is vital for financial success. But what can financial literacy do for you?

Below we have listed the basics in financial literacy to get you started: 

• Budgeting Strategies
• Good Debt vs Bad Debt
• Smarter Savings
• Building Your Net Worth
• Retirement Planning

These are all concepts that every adult needs to learn to have financial well-being!

Budgeting Strategies 

A simple way to start your financial literacy journey is by creating a monthly budget. There are many budgeting strategies available to help keep you on track. Here are some options we’ve discovered to be straightforward to incorporate into any budget:

1. 50/30/20 RULE
   
   This strategy states that 50% of your income goes towards needs, 30% towards wants, and 20% is to financial goals.


2. 70/20/10 RULE
   
   70% of income goes toward life essentials (food, shelter), 20% for financial obligations (debt and loan repayment) and 10% on savings, charity, money for financial goals.


3. REVERSE BUDGETING
   
   Essentially, you pay yourself first, so you allocate your income towards your goals (savings, holiday, investment), then distribute to fixed expenses (mortgage, utilities, loan repayments) and lastly towards wants (groceries, entertainment, clothing, gifts).


4. 33% RULE
   
   This is going to differ on where you live. Divide your income into three parts – 33% as housing, 33% as expenses, then 33% as everything else.

Good Debt vs Bad Debt 

Debt no one likes the word, am I right? It is a financial obligation, though, that you need to repay at some point. 

However, there are two types of debt: good and bad debt.

Bad debt is when the expenditure has little or no benefit in increasing your financial security, eg. purchases like a new TV, clothes, dining out, entertainment etc.

On the other hand, good debt refers to borrowing money for financial assets that will increase financial security, eg. buying a house for financial gain, borrowing money to invest in shares, student / HECS loans. 

It is often hard to discern between the two forms of debt; therefore, you need to think about your financial goals and whether the debt increases financial security. 

Smarter Savings

Building financial literacy basics include becoming smarter with your savings.

Automating your accounts and savings takes the burden off your shoulders and removes the temptation to spend the money. In addition, by automating your savings, you gain time back so you can concentrate on other aspects of growing your financial wealth. 

Next, you will need an emergency fund to help cover unforeseen expenses and hold you over until that money can be spent again. You also want this fund to increase over time so that you will benefit from the power of compound interest.

Finally, make sure to maintain several savings accounts so you can keep track of your finances for each financial goal. 

For example, suppose you’ve saved everything in one account. In that case, it’s easy to inadvertently divert money intended for your emergency fund to, eg. a holiday. For example, if you had $25,000 saved in one account, you would need to keep track that $10,000 is for your emergency fund, $5,000 for a holiday, $10,000 for purchasing a new car. 

If you separated the three different savings accounts, it would be easier to track as you build up to your savings goal. Multiple savings accounts also provide a clear picture of how far you’ve come toward your various savings objectives.

Building Your Net Worth

The adage goes, “spend less than you earn,” which is the ideal approach to increasing your net worth. Cut down on your living expenses, increase your earnings and build a passive income.

Shopping for reduced costs is a quick method to grow your money, and that’s why it’s always worth comparing prices. Assume you’re happy with the services you presently receive. Why not contact your current providers and attempt to negotiate a better price?

Another technique to boost your income is to take on a second job. Gaining low-skilled secondary employment but flexible hours can increase your earnings; examples include Uber driving, Uber eats, surveys, and Airtasker. 

On the other hand, suppose you’re highly skilled in a specialised service such as web design, financial planning and copywriting. Then, think about how you could monetise your skill by freelancing on Upwork or Fiverr.

Consider starting an online business on sites like Etsy or Shopify; this business opportunity may be self-sustaining in the future, saving you time and increasing your bank account. 

When you generate a passive income, money works for you rather than against you; this can be done by investing in assets such as real estate and shares that generate revenue.

Retirement Planning

Retirement planning is an essential component of personal financial literacy for individuals wanting to safeguard their financial future. 

For young people, it’s important to start early since this will allow you to take advantage of long-term compounding interest, which can substantially increase your superannuation amount. However, if you begin later in life, it may be worthwhile to consider working longer and taking some financial risks. 

For example, to increase your superannuation, you may consider making voluntary contributions. It’s essential to determine how much money you’ll require for retirement to calculate your future portfolio size. In addition, you need to consider expenses such as the mortgage if it’s not paid off, or unforeseen medical expenses that could develop. 

Striking a proper balance between reasonable return expectations and a wished-for standard of living is a challenging aspect of putting together a retirement plan. The ideal option is to develop a portfolio that is modified regularly to reflect market circumstances and retirement goals. 

A financial planner can assist you in determining the right mix of investments for your portfolio. Financial literacy is becoming more critical in today’s economic climate. You’ll be better equipped to make financial decisions if you’re financially educated. However, it’s always best to consult with an expert who can examine your particular situation and give you expert tailored advice.