How to Build Financial Literacy

They teach you maths, science, history, language even drawing, music, etc. but they don’t teach you finance in school or colleges. Unless, you choose economics, finance, investment, or business in your high school or college, you will never have any idea about finances. Knowledge of finance is as important as the knowledge of language and history, yet they don’t teach you finance. In fact, learning finance is more important than learning history because financial education will give you knowledge on how to secure your future (you cannot live in the past, right?). Lack of financial literacy will make you broke. Finance is important because it will help you survive.

6 Things You Should Know In Order to Build Financial Literacy

It sounds very scary to hear that 95 percent of college graduates do not know what a financial statement is. It is scary because what are they going to do in their life with the lack of financial education?

If you want to be financially literate, you need to understand these 5 things.

Income: Income means the money you make. Money can come by working, through capital gains (profits you make by selling your assets), or passive income (the money comes without having you work or sell assets)

Expense: Expense is your spending. You spend money on essentials, you spend on luxuries.

Asset: Asset is a resource with economic value that can be stocks, equity in a company, properties, cash, etc.

Liability: Liability is an economic obligation that is payable to other people or instructions, such as tax, loan, etc.

Cash Flow: Cash flow is in and out of money. Cash flow is the flow of money that comes in as an income and goes out as an expenditure.

The entire financial education is centered around cash flow. The ability to manage cash flow will make you financially free.

You don’t become rich by going to college, you become rich if you know cash flow management.

How to Improve Your Finance Through a Budget

A budget is the single most effective tool to manage your money. When you are able to manage your money, you can not only save money but also start investing. When you are saving and investing, you will grow your net worth and become a financially stable individual.

The number one rule is to create a monthly budget. In your budget, you should include your all income and expenses. If your previous month's budget showed a negative balance sheet, try to reduce your expenses.

In order to create a better budget, you should use the rule of 50/30/20, where you allot 50 percent budgetary expenditure on your necessities, 30 percent on your wants, and 20 percent on investment and savings. If your expenses do not fit within this rule, look through your bank statement or credit card statement and start cutting your expenses.

The third most important rule in creating a better budget is to pay off your debt. If you don’t pay off your debt, you will be wasting a lot of money just on interest.

Two Steps to Manage Your Money

Money management is a very essential skill in order to improve your personal finance, however, the main question that needs to be addressed is how to manage your money.

Keep Your Money in Banks: Well, I am not in favor of saving money in banks because your money can lose value due to inflation and the rate of return is not much high, however, this does not mean you should not keep money in bank accounts. Use banks to receive your earnings and make a payment (loan repayment, bill payments, purchases, etc.) By doing this you will know how much money you need to maintain your life, and how much you can save in your emergency funds and investment funds.

Use Your Money to Make Money: If you are already making money, learn new skills so that you can make money through other means. Once you start earning extra money, use that money to build a business that will generate additional income. When you start generating business revenue, start investing.

Building Financial Literacy: The Conclusion

When it comes to managing your finances, you should never trust someone who does not have good knowledge of finances or someone who does not have any experience with managing finances. Therefore, friends or family should be the last person you should go to get advice on finance (unless he or she is an expert on this subject). In order to learn about finances, you need to read books from finance gurus, you need to watch their interviews. You need to build your financial literacy to build your knowledge on how you can manage your finances, how you can start investing, or start creating your own budget.