Financial literacy is the ability to effectively manage your money, which can help people make good decisions about their personal finances. It is important for people to understand their financial situation and make decisions about how they will use or manage their money. This includes understanding how much money you have to spend, the interest rates you might earn on savings accounts, what investments are available and how much those investments are worth.
School never teaches me!
Unfortunately, financial literacy is seldom taught in mainstream schools. In schools, we are taught Math, Science, English, Chinese etc but never on the topic of money itself. Topics such as these are never taught in school. But why wasn’t it taught?
How to manage money? How to budget? How to plan your monthly income/saving/expenses? How to grow your wealth?
These are important questions that one should ask before one eventually graduate from school and get the first paycheck. But how many really ask these questions? In the end, we have many people having lots of credit card debts, no savings, no investment etc after years of working. They often asked where did the money goes to?
Financial Products from “Financial Advisors” will help you
When you first graduate from school, suddenly many of your friends, ex-friends etc become guru and came to you to sell financial products. Did you experience this?
They will come to you and tell you that you can invest in this investment linked policy which will be good for you in the long term. Investment linked policy can give you both insurance protection and investment return at the same time. Isn’t this great?
As compared to term insurance where it only gives your protection, but you cannot get back your money. For investment, as you are still new to managing your first paycheck, don’t worry I can help you to investment (suddenly your friend that graduate with you become guru? Isn’t it amazing?).
Just buy xxx Investment Link policy that have both protection and investment features. Best of both world. Isn’t this great? This marvelous investment linked policy can do the job for you – protect you and give you investment return at same time without you to do much. Just regular saving plan and put a small lump sum of maybe $100-$500 monthly from your paycheck. A simple thing from you!
Many of us (including me) fell for it and bought investment linked policy. What happened? Did you really get the return you want? Most of us after a while, will totally regret this decision. This decision didn’t fatten your pockets, most of the time it fattened the salesman’s pocket. Why do I say so?
Most of the time Investment Linked Policy has high commissions. High percentage of your premiums for the first few years will be given to your guru “Financial Adviser” and then slightly lower percentage given to them for the subsequent years. This is great “passive income” for THEM but not for you!
Decipher your monthly investment linked policy statement, the underlying funds for the investment linked policy usually has high first-time sale charges of 3-5% and expense ratio of 2% and above. Long term market return is 5-7%. Minus these, could you tell me how much you are left with, and can you earn from your this “investment” from your kind guru financial adviser? Furthermore, these are only the few charges. Go read this article and find out how many types of charges are there. It will scare you! Did you agent tell you the above when they sell you the product?
Of course, the above apply to most investment linked policy. They are some which are good, rare policy but you have to do your due diligence (provided you know how to do it).
Sadly, most people weren’t taught financial literacy in schools. We have to self-learn and discover. I have been through the hard way and lost a lot in the process. I can talk hours/days about investment and financial literacy. Let me share with you on some of the key things that you should at least know that it existed to shortcut your journey.
What is Financial Literacy?
Financial literacy is the ability to make informed decisions about personal finances. It’s a way to help people learn how to manage their money, protect it and build wealth. It helps people understand what they can do with their money, who they can trust with it and how to make sure that they’re making smart choices throughout their lives.
While most adults think they are financially literate because of the simple fact that they are able to use ATMs and sign checks without assistance, this isn’t necessarily true. There’s even a gap between what we think we know about our finances and the reality of our situation.
There are many components of financial literacy that one should learnt and make sure they are well versed in it.
Ensure Income larger than expenses
This is the first most important step.
Make sure your income is always greater than your expenses. You should try to have a surplus so that you are not living paycheck to paycheck, always worried about money and unable to save for the future.
Having an emergency liquid fund is also important because you never know when an unexpected expense might pop up (like if your car breaks down) or if something like illness or job loss comes out of left field and causes financial distress. Having some savings set aside means that you won’t have to go into debt just to get by until things get better again.
Create a budget.
The next step is to create a budget.
A budget is a plan for your money. It’s a tool that helps you achieve your financial goals, such as saving for retirement or buying a home. A budget can also help you save money by showing where your money is going so that you can make changes to reduce spending on unnecessary items and increase savings.
To create a budget, start with an estimate of your monthly income in each pay period and then subtract the amount of any fixed expenses that aren’t likely to change (child care fees, rent/mortgage). Next add up all other regular monthly expenses (car payment, groceries) and divide by 12 to get an average cost per month. The final step is to set aside some money every month for irregular expenses like car repairs or replacing worn clothes so that they don’t catch you by surprise later on when they pop up unexpectedly
Developing good spending habits.
Next, you can try to develop better spending habits. To do this, it’s important to understand the difference between needs and wants.
A need is something that you must buy in order to survive—food, shelter, health care and clothing are all examples of things that fall into this category. A want is anything else that’s not essential for survival. It may be someone’s preference or desire but it’s not necessary for survival; thus people have no problem living without them.
Once you’ve identified your needs versus wants and established a budget for each category of expenses (such as rent/mortgage payments), spend less than what you budgeted for each month by cutting back on unnecessary expenses such as cable television subscriptions or going out with friends every weekend night (which could add up quickly).
The importance of saving money.
Saving money is a habit that takes time to develop, but it’s something you’ll thank yourself for later in life.
There are several reasons why saving money is important: you never know when an emergency will happen, saving for the future helps ensure that you have enough money to enjoy it when you’re older, retirement savings can help fund your golden years, rainy day funds can help take care of unexpected expenses and provide some financial security if an emergency strikes, children’s education and other expenses should be planned for well ahead of time so there aren’t any surprises down the road when it comes time to pay those bills; finally having enough saved up for emergencies means that even if something happens unexpectedly (like losing your job or getting sick) then at least part of your finances won’t be affected by this change in circumstances.
Creating a realistic plan for paying off debt.
If you have any debt, do consider using the debt snowball method, you pay off your debts in order of smallest balance to largest balance. This is because paying off one account frees up more money to use on the next larger account, which means you’re able to pay down your debt faster.
The first thing you should do is set up a budget. It’s important that you know how much money comes in each month (your income) and how much money goes out each month (your expenses). This can help you make decisions about how to prioritize paying off your debts based on what’s most important or financially feasible for now.
When setting up a budget, remember: The best way for anyone who has trouble sticking with budgets is by keeping track of every dollar spent via an app or simply just excel/notion template (which also have features like tracking investments and net worth) so there’s no guesswork involved when it comes time to make spending choices later on down the road!
After sharing so many things above, do you know what is the most basic thing in Financial Literacy that one should know? See picture below.
Build emergency funds before investing
The next most important step for a beginner investor is to build an emergency fund. You need enough cash in your bank account to cover 6-12 months of living expenses in case you lose your job or have an unexpected health issue.
The best way to build an emergency fund is by saving regularly and consistently, rather than trying to save up large sums all at once. Once you’ve saved the money you need, invest it in low-risk investments such as savings accounts or fixed income until you’re ready for something more advanced.
The amount of cash that should be saved depends on how much debt you have and what your income looks like. For example, if someone has significant student loan debt (i.e., $50k+) with a high monthly payment ($600+), then they should aim for 10-12 months’ worth of living expenses before investing any money away from their savings account(s).
If someone has no debt at all but doesn’t make much money either (less than $30k/year), then it would still be wise for them not to invest too much into risky assets just yet because they could run into problems if they hit hard times without any savings available on hand! It’s always good practice when starting out as early as possible though—just don’t go overboard!
Wealth management strategies
Once you have enough emergency funds, you can cut out some funds for investment. Make sure you will not need the investment funds for at least 5-10 years.
After which, plan your wealth management – diversify and invest in a portfolio of assets. This can be done through mutual funds, individual stocks and bonds, or real estate investments.
Investments should be diversified across different asset classes (e.g., stock market, bond market). Diversification reduces risk and enables investors to maximize returns when markets are increasing at the same time they protect against losses when markets decrease. Investors are also encouraged to monitor performance regularly as well as develop cash flow management skills so they can ensure that their finances remain healthy despite market fluctuations
Investment to grow wealth and build cashflow
An investment is a commitment of money or capital to an asset with the expectation of earning financial return. For example, if you buy a stock for $10 and sell it for $15, then you have made an investment and earned a profit (i.e., $5) on your initial purchase. Do check out this timeless free investment guidelines.
Investing is different from speculation because it involves putting money into something that has intrinsic value – like real estate or gold jewelry – as opposed to just betting on something that may or may not happen in the future (such as buying lottery tickets).
Investing can also be used as a tool for building cash flow: when assets generate income streams such as interest payments or dividend (do check out this free checklist) or simply rental income, this is known as “passive income” because the investor doesn’t necessarily have any active role in generating these revenues from his/her investments; rather they are generated automatically due to ownership rights over specific pieces of property (or contractual relationships with tenants).
Retirement planning for the future.
After one has built sufficient wealth, the next step is planning your retirement is to look at your current situation and identify the changes you need to make. The following questions will help you get started:
- What is my current financial situation?
- How much money do I need to save for a comfortable retirement?
- How much do I already have saved for retirement, and how much more do I need to save?
- Should I top up my government aided retirement scheme such as CPF scheme in Singapore?
One way to check if you have enough for retirement is to use the typical 4% withdrawal rule as a guideline for how much of your retirement fund can be withdrawn each year without depleting it entirely. As long as you keep enough in the account, this will ensure that there will still be money available for when you do retire.
The topic of financial literacy is a big one. In this article, I have covered everything from setting up your budget to managing debt and planning for retirement. I hope that you now feel more confident in your financial knowledge and can use it to make smart decisions about your money.
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