Financial Literacy Rules

Financial Literacy Rules

Many people are familiar with this situation: money seems to evaporate with a relatively good family income. It is enough for basic needs, for some entertainment. But you still have to restrain yourself in many ways. Knowing the basics of financial literacy, people can manage their income and expenses, protect themselves from many adverse situations, and increase their capital. Alas, financial literacy in our society is relatively poor. However, this gap can quickly be filled.

For example, it is better to bypass gambling entertainment sites if you have a limited budget for the month. If you have extra money and like slots, you can visit sites like Bollywood, but you need to know the measure.

Financial Literacy: The Basics

Many people cannot call themselves wealthy: their money is “eaten up” by irrational purchases, consumer loans, and other factors. It is a direct consequence of economic illiteracy.

What is financial literacy? It is the ability to manage money properly. What it consists of:

  • Changing one’s attitude toward money. It would be best if you saw it as a tool: an object you can work with to increase your wealth.
  • Accounting and planning. Knowing how to manage available income: in real-time, in the short term, and from a strategic perspective.
  • Ability to work with financial institutions. Knowing your rights and obligations with banks, insurance companies, and other financial market participants.
  • Finding and developing sources of passive income. These are each person’s reserve and pension funds.
  • Knowing how to invest. One of the most challenging things to do. But it is much more effective than regular cash savings.

How do you become financially literate? There are many ways. The most convenient – is to be trained by a financial consultant. But it is possible to master the principles yourself. To do this, you need to:

  • Read books on financial literacy, take specialized training;
  • Analyze the experience of successful and wealthy people in your environment: those who got rich through their efforts and talents;
  • Follow the recommendations below. Their task is to make a person financially independent;
  • Teach children financial literacy: it is easier to lay down the basic principles in childhood. It is the first step to success in life.

Critical rules of financial literacy

It is not easy to change: especially when a person is used to a specific behavior model. But realities show that changing your attitude toward money is necessary: even the highest income cannot be forever, and the economy is becoming more unstable every year. That is why we have made the basic financial literacy rules available to everyone.

No matter how much you earn, spend less

It is a fundamental principle: you must learn to live within your means first to move on, not deal with endless debt. Therefore, knowing how to limit your needs and save money is an essential skill. Without it, the following rules cannot be followed.

Interesting fact: In 1960, Stanford University conducted the famous “marshmallow experiment. A group of children were each given a piece of marshmallow. The researchers warned that they would leave the room for a while, and those who did not eat their treat during this time will receive an additional portion. The experiment showed that about 30% of the children held back and got more. Years later, they were more successful in life compared to the other 70%.

Yes, some can manage resources wisely from childhood. The rest will have to learn, no matter how hard it is.

Follow the 10% rule

The principle is elementary: put aside 10% of your monthly income. Whatever it is, it is quite possible to live on 90%. The remaining amount will be the basis for new savings, forming a reserve, investment, and other funds.

Buy only on the list

The first step to planning is to make a shopping list. It should include everything to the smallest detail: from appliances (if you need them) to paper napkins. Ideally, it would be best if you consisted of prices for each item. Now there are many programs and mobile apps that simplify this process. At the same time, you can track where the money goes and what part of the income each category of purchases takes. Sometimes people make unpleasant discoveries: for example, that the “traditional” daily beer steals a quarter of their monthly payment. So it’s already something to think about.

Beware of spontaneous purchases

That’s what the list is for: to put the things you need in your shopping cart. Sales professionals use hundreds of tricks to get consumers to buy hundreds of unnecessary items. These include color combinations, fragrance sprays, promotions, and discounts. Therefore, to go to the store (or go to the website of the online store) should be with a list, preferably on a full stomach. If it is difficult to resist, you need to take with you exactly the amount for which the shopping list is calculated.

The global advertising market in 2021 is estimated at $725 billion. Much of this capital is spent by brands and companies to stimulate spontaneous purchases. Hence the conclusion: you must resist and save money, despite all the temptations.

Take into account and plan your income and expenses

The laws of financial literacy say that economic growth begins with understanding how much one earns and spends. Starting with a shopping list, expand your accounting skills in a particular program or an ordinary notebook, and list all existing sources of income and all standard monthly expenses. It will allow you to see the accurate financial picture and draw conclusions.

Make a financial plan

  • When the previous task is done, you can move on to planning. The base of the financial plan is vital expenses:
  • buying groceries, mandatory items (hygiene products, etc.)
  • Paying for utilities;
  • transportation costs;
  • standard monthly payments (e.g., tuition, insurance);
  • Entertainment expenses.

It is the usual monthly plan. In addition, you need to make a long-term plan for a year or several years to come. What is it for? To plan for strategic purchases and expenses. What it might be:

  • Your child’s university tuition;
  • buying a car;
  • Purchasing an apartment/home;
  • Moving to another country, etc.

If you plan for major expenses, you can determine how much of your income you want to spend now. Hence the desire to buy a car (for example) will acquire a factual executable basis, rather than remaining just a dream.

And vice versa – a person without a strategic plan will spend income spontaneously, leaving no groundwork for the future. Faced with the need to pay for his child’s education, he will be forced to rely on a loan or hope that the graduate will “skip” the budget form.

graduate will skip the budget form

Create Reserves

Every country and every company has a reserve fund. It protects against market unpredictability: financial crises, inadequate government decisions, and other risks. Every family should have its reserve fund. It is a monthly piggy bank. It should be spent not on a new smartphone but on solving unforeseen problems (treatment of sudden illness, repair of an apartment flooded by neighbors, expenses for a lawyer, etc.). The quarantine imposed because of the coronavirus pandemic showed: the owners of reserve funds more easily cope with a temporary loss of work and income.

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.