Financial Literacy Month – what it means and how it can help you

Although it started out in the US due to the high numbers of people struggling financially, Financial Literacy Month could be used and applied almost anywhere in the world where people need help and guidance with their finances.

Finances are a sensitive topic but if you’re armed with the right information, you can make more informed choices about them.

So what is financial literacy and what are its five core principles?

Keep reading to find out!

What is financial literacy

According to the United States Treasury’s Financial Literacy and Education Commission, the term “financial literacy” is about the ability to use knowledge and skills to “manage financial resources effectively for a lifetime of financial well being.”

The origins of financial literacy started as far back as 2004 when the US Senate passed a resolution which officially recognised April as Financial Literacy Month.

The purpose of this was to raise “public awareness about the importance of financial education in the United States and the serious consequences that may be associated with a lack of understanding about personal finances.”

The five components of financial literacy

The five core components of financial literacy are: earn, spend, save and invest, borrow, and protect.

We take a look at each one in turn below.

Earn

A majority of employed people around the world live paycheck to paycheck. 
Many struggle to balance their incomes against expenses and debts.

It’s critical to take a close look at your paycheck, determine what deductions your employer is taking off (whether for health insurance or retirement) and see what you are left with at the end of the day.

This will help you allocate your funds more appropriately when it comes to the second core point of financial literacy: spending.

Spend

Spending is inevitable. 

We need food and groceries to survive. We also have to pay monthly water and electricity bills, put petrol in our cars, educate our kids and the list goes on.

However, you need to try to make sure that your expenses don’t exceed your income.
In this scenario, the 50-30-20 rule might come in handy.

Spend 50% of your income on necessities, 30% should be allocated to your wants and 20% should be saved up for a rainy day.

Save and invest

Speaking of saving up for a rainy day, financial experts say that it is important to put some money aside each month in case of emergency.

You never know when it will strike – be it a medical condition of you or your loved one, or something happens to a previously employed person in your family who can no longer work.
It is suggested that having the equivalent of three months of income on the side is good practice.

What’s more is that you don’t always need to save physical cash on a monthly basis. You can also consider investing.

Doing so in an immovable property is not a bad idea because not only will your property be yours after a certain period of time, but its value increases over time too.

You may even consider investing in a business or shares.

When doing so, however, make sure you speak to a financial consultant who will discuss the risks and potential opportunities for doing so.

Borrow

We all have to borrow funds from time to time.

Whether for a new car, a home, a wedding or your child’s university education.

This means the accumulation of debt.

With debt come interest rates which you will need to pay back to your financial institution and it certainly means that your debt amount will be larger because of it.

When taking out a loan or getting credit, opt for lower interest rates on the credit and try to pay it off sooner than the anticipated deadline.

Dealing with debt as quickly as possible is the best option to having a sense of financial freedom.

If you’re tied to banks and lending institutions with long lines of debt and credit through credit cards or other loans, this will ultimately affect the disposable income you receive as each month, you’ll be looking to settle debt rather than spending or saving for more important things.

Protect

The final core principle of financial literacy is protecting yourself.

We will all end up retiring one day and how you spend and save during your working life will make a difference to retiring with dignity.

This is why it’s suggested that you invest in life insurance, retirement policies and other similar instruments to help you secure your future better.

Conclusion

Starting out learning about financial literacy can seem like a daunting concept, but it doesn’t have to be.

Financial literacy is not necessarily about fancy and complicated accounting terms.
In fact, it’s the day to day management of your income and expenses.

If you take the time to educate yourself about financial concepts and how to make the most of your income while reducing your debt, you’ll be able to enjoy a lifetime of financial well being.