Financial literacy is one of the most crucial life skills you can possess. It is the ability to understand financial concepts and make informed and effective decisions with one’s finances. It is mandatory for everyone, regardless of age or income level, to have a basic understanding of financial concepts to make sound financial decisions throughout their lives. So, for example, if you buy a car, it’s best to pick the best type of car loan and shorter terms. How to get a car loan? Find the answer here. And today, we will explain the critical components of financial literacy and why everyone needs to learn these concepts.
Earn
The first concept in financial literacy is earnings and income. It is the money that you bring in from working or from investments. Understanding how much money you are bringing in so that you can make informed decisions about spending and saving is mandatory. There are two types of earnings: active income and passive income. Active income is the money that you earn from working. Passive income is the money you earn from investments, such as dividends or interest on savings accounts.
Spend
The next concept that I’d like to introduce is to spend it right. This is the act of using money that you have earned to purchase goods or services. When you spend money, you are using up your earnings. Spending money is not necessarily a bad thing. Spending is necessary to live a comfortable life. However, spending wisely and not overspending on unnecessary items is necessary. A rule of thumb is only to spend 70% of your earnings and save the other 30%.
Save
As mentioned, a good rule of thumb is to save 30% of your earnings. When you save money, you are setting it aside for future use. It is essential to save money to cover unexpected expenses or take advantage of opportunities when they arise. Budgeting is the best way that you can do it. It’s the process of allocating your earnings towards different savings goals.
Invest
The next concept I want to discuss is to invest. When you invest, you use your money to purchase assets such as stocks, bonds, or real estate. These assets have the potential to grow in value over time, which can help you build wealth. Investing is a great way to secure your financial future and create long-term wealth. Investing is not something that you can enjoy in the present, instead, it is something that will benefit you in years to come.
Protect
The last concept that I want to discuss is to protect. This is the act of safeguarding your money and assets from loss. There are many ways to do this, such as insurance, diversification, and asset allocation. Insurance is a way to protect yourself financially if an unexpected loss, such as death, disability, or illness. Diversification is a way to reduce risk by investing in various assets. Asset allocation is allocating your investment portfolio among asset classes, such as stocks, bonds, and cash.
These are just a few key concepts that are important to understand regarding financial literacy. Learning about these concepts is the first step to making sound financial decisions. However, it is also essential to continue learning about personal finance to keep up with the ever-changing financial landscape. While financial literacy is critical, it is only the first step in making sound financial decisions. You also need to be proactive and stay up-to-date with the latest changes in financial trends.