Funding tuition fees, managing savings and investments during the transition from high school to college, and timing the purchase of significant investments require careful consideration of various financial aspects. This can be an easy walk for those who are financially aware. But no need to fret, if you are not quite there yet. Learning financial jargon and gaining an understanding of the world of finance is the first step towards that, according to experts.
What is financial literacy?
Ameet Chandan, assistant vice president at Way2Wealth Brokers Private Limited, describes financial literacy as, “your grasp and effective use of various financial skills – from budgeting and saving to debt management and retirement planning”. It equips us with the knowledge to make informed decisions, leading to greater monetary stability, less stress, and a higher quality of life. Financial literacy empowers us to take control of our finances and tackle the challenges and opportunities that arise.
Why is financial literacy important?
Those with good financial aptitude not only manage money with confidence, but also have a better chance of handling the natural financial ebb and flow. “That can mean keeping a close eye on their bank and credit card accounts, so they are aware of potential fraud as soon as possible or being able to quickly recover from an unexpected and costly car repair, thanks to ample cash savings,” explains Chandan.
Enhancing your financial aptitude takes time and effort, but it is worth it in the long run. Greater Noida-based financial expert Neha Nagar says a financial plan is like a roadmap for your money. “There are many free online tools to help you create a budget and track your progress,” she founder of Taxation Help.
Components of financial literacy
Ameet Chandan suggests being aware of these five key components of financial literacy:
Budgeting
You can think of budgeting as the bedrock of your whole financial life. It is a plan for how you will direct your income toward expenses, spending, and savings goals. Without a budget, it is all too easy to overspend and live paycheck to paycheck. A personal budget, on the other hand, can make meeting your financial obligations more predictable.
Saving
Saving is a crucial financial move because it is how you build security and work toward your money goals. Your first order of business should be setting up an emergency savings fund and aiming to keep around three to six months’ worth of expenses socked away. Beyond that, saving in advance can help you afford anything you need or want, from unexpected car repairs to next summer’s vacation, without going into debt.
Managing debt
For better or for worse, debt is a common part of financial wellness. People borrow to achieve any number of goals. You might take out student loans to attend college, an auto loan when you need a new car or a mortgage when you are ready to buy a house. You might also use a credit card or take a personal loan when you want to finance a purchase and pay it back over time. But debt can also be destructive to your finances. Financial literacy plays a pivotal role in managing and avoiding debt. It helps people understand the implications of loans, interest rates, and credit, enabling them to make wise choices and avoid falling into the debt trap.
Investing
There is a common myth that investing is only for the super-wealthy and out of reach for most people. In reality, investing does not require lots of money. In fact, it is a healthy financial habit everyone should develop as early as possible.
Managing credit
Good credit is a key piece of a solid financial foundation. When you build and maintain a good credit score, you will have access to credit at better terms. For example, you will be able to qualify for a mortgage when you need to buy a home and a lower-rate auto loan when you need a car. You will also have an easier time qualifying for credit perks such as 0 per cent introductory APR credit cards and rewards credit cards.
Financial literacy is not a one-time fix but an ongoing journey that, when embraced, leads to financial empowerment. But if we can keep the grit and stick with these components of financial literacy, we will be well on our way to financial stability, if not freedom.
