What is Financial Literacy?

Financial literacy means to understand the basic concepts of finance, like budgeting, money management, time value of money, interest rate, investing, debt management, savings, expenditures.With the financial literacy you will be able to take prudent financial decisions to make your life financially free.

Financial Literacy

In simple words, to be a financially literate, one must know how financial resources work, where money comes from? How money works? How and where to utilize money? Where to invest money? How to escape yourself from any financial fraud?

Financial education is as important as any other education, especially if there is need to grow financially then it’s imperative to learn the skills of financial education. Without having expertise in these financial skills one will remain in the vicious circle of poverty and one cannot grow the ladder of financial success.

 

Financial Literacy Skills

Learn Budgeting

Budgeting simply means to prepare a forecasting plan to spend your earned money in a wise manner. This plan of spending money is called budget.

Budgeting

As we know that planning is most important in every field of life. Budgeting is financial planning and its very important financial skill that every one musk knows to be successful in financial matters. Your budgeting plan will help and guide you to take excellent financial decision. It will control all your earnings and spending. It balanced your income and expenses. It will direct you where you have to spend and where you have not.

A good budget plan never allows you to spend more than your income. It also provides the basis to future planning.

 

Know Your Net Worth

Everyone has its net worth. You should know yours. But you can ask what net worth is and how it calculated? Ok, I am telling you, your net worth will be the difference value of your total assets and liabilities.

Know Your Current Net Worth

Assets: Assets can be anything which you have and posses financial value, for example your money in bank, Car, Apartment.

Liabilities: Liabilities are those things of monetary value which you have to pay someone else, forexample, car loan, credit card.

If you have your total assets of $ 350,000/- and your total liabilities of $ 250,000/=

Then,

Your total Assets – Your total Liabilities =   Your net Worth.

$ 350,000 – $ 250,000 = $ 100,000.

Your net worth may be negative, if so then you are highly vulnerable financially, and you should try to get rid of your debts and liabilities and convert your net worth to positive figure.

 

Know Your Source of Income

Being a financial literate person you should know two different types of incoming income. Which are active income and passive income?

Know your sources of income

When you are directly involved to earn some money then that will called an active income on the other hand, if you earned some income without your direct involment then it will be your passive income. Your paycheck is a good example of your active income and your income from interest bearing bond and capital gain from stock share will be your passive income.

 

Learn to Save Money

“Do not save what is left after spending but spend what is left after saving.” Warren Buffet

Saving Money for Rainy Days

Saving means to set aside some money on regular basis monthly, quarterly or yearly to cater a future need. Everyone wants to save money, but it’s not an easy as easy as it seems to be, that’s because of lack of planning, budgeting.

Ones you will be literate financially, then it will be easy for you to save your money, investing.When you will have a full control on your earnings and spending, you will find a way, how to save money?

 

Learn Investing

An investment is an asset or commodity that is acquired for the purpose of generating income or making a profit. In financial science, investing is a financial asset, like a company’s stock, bought with the intention of increasing its value in the future and making a certain profit by selling that asset at a higher price.

Learn How to Invest Wisely

In another definition, investing is any sacrifice of a present value, the amount and amount of which are known, in the hope of acquiring any value in the future, the size or quality of which is usually unknown. In other words, the investor is currently sacrificing a certain value in order to get the desired value in return in the future.

 

Concept of Compound Interest

Concept of compound interest is an important financial education skill which one should understand to increase his wealth in a less time period.

Understanding Interest Rates

Compound interest means the interest you earned on your principal amount of investing plus on the earned interest. That is working just like a snowball, and it speeds the growth of your wealth faster. It is basically interest on interest.

 

Understanding Time Value of Money.

Learn Time Value of Money

Time value of money is a key important financial concept that everyone should understand. It means that the the value of one Dollar is worth more than a one Dollar you will receive in any future time. It’s because of the concept that money makes money. With the money you have today you can earn more money by investing and in the shape of interest. Therefore the present value of your same money is more than the same money you will get in future.

As time is the money, so it gives the value to the money

 

Learn Management of Debts

Debt management is a strategy or a planning process that involve, repayment of your debts, how to reduce your debt by early payments and eliminate at the end.

Learn to Manage Your Debts

It’s very important to understand that how your debt working, what are the strategies to deal with your debt to reduce and eliminate it.

While managing your debts and liabilities, you are dealing with your creditors; you should know how to communicate with your creditors to come them in points which are favorable to you.

There are many ways to manage your debt, you can access to a debt management company to make a debt management plan for you and act up accordingly. You can negotiate with your suppliers, pay attention to current and future terms of interest rates and improve your cash flow management.

 

Importance of Financial Literacy

As we know that, in the current era every one of us is pre occupied of financial matters, our every activity is revolving around the subject of money. We deals with money every day directly or indirectly, here indirectly I means that now a days we have many of financial instruments by using them we performs many financial tasks. I mean we have credit, debit cards, online shopping’s via bank account and many other credit options we have to operate.

Financial literacy is to understand all about money, financial instruments,credits,loans.Just think if we could not understand all these financial terms and don’t know how all these working? Then how we can expect to get better results from our financial decisions. How we can use efficiently all these financial instruments without knowing them. So it’s very crucial and imperative to have a deep knowledge of financial terms and it’s called financial literacy. If you want to be wealthy and get financial freedom then financial literacy is must. Without it you cannot grow financially, you will not be comfortable; you will increase your debt burden with poor financial decisions

 

Conclusion

If you want financial freedom in your life and wants to leads a free and stable life then you should master the financial skills. Financial education is as important as any other education, especially if there is need to grow financially then it’s very important to learn the skills of financial education. Without having expertise in these financial skills one will remain in the vicious circle of poverty and one cannot grow the ladder of financial success.

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