Financial literacy is what you need to take better control of your finances. But what is financial literacy and what are the keys to mastering it? If you want to learn more about how to become financially literate, read this article.
What Is Financial Literacy?
Financial literacy is about understanding how money works in the world. It teaches you how to acquire, manage and invest your own capital. A person who is financially literate can make informed decisions about their finances and is less likely to get into debt or financial difficulties.
So, what is financial education? We can sum it up in one phrase: getting people to improve their financial wellbeing by managing their money effectively.
All countries have robust online resources to help savers learn how to manage their finances. For instance, in Italy, renditepassive explains how to manage your money with awareness. Most importantly, it separates the concept of investing from betting.
Financial literacy terms you should master as soon as possible
There are five financial literacy terms that you will hear over and over again in this field: income, savings, spending, investing and debt, but what are they all about?
This is the money you get from your job or earnings. A household can have more than one source of income.
This is the money from your salary or all your income that you do not spend. It is generally recommended that you set aside a percentage of your income for this purpose. The only way you can’t save, even a small percentage of your income, is if your expenses exceed your income.
They have their own classification, and just as there are necessary expenses (such as basic services), there are expenses that are not. Basically, expenses are the economic obligations that we have to pay each month.
Some of the money you earn can be invested. This means that your money is not static in a current account. Investments can be short, medium or long term.
Here we can talk about “debt capacity”, which allows us to have a source of money (provided by financial institutions) to acquire things. Good debt management allows you to have a good credit history, which leads to better loans or credits (for example, a mortgage loan), while bad debt can lead to bankruptcy in the worst case.
Keys To Financial Literacy
Those who have a clear understanding of financial literacy will generally have healthy finances.
Here are some keys to remember:
To have healthy finances, you need to be aware of your income and expenses. This is why it is important to manage your own personal budget.
You need to be aware of what you earn and live accordingly. Living a lifestyle that exceeds your monthly income will get you into debt.
Never pay your debts late, whether they are utility bills, credit cards or loans.
Before you become an investor, be concerned about understanding exactly how to maintain a good credit rating, as this will allow you to access greater financial benefits.
Don’t leave your money in the bank. Instead, invest it or deposit it in a bank account where you can earn more interest.
Any investment you make should be informed. Always weigh up the pros and cons of an investment.
Prepare for the future by building up a savings fund for your retirement or keeping your money in a safe place.
The Importance Of Financial Education
Financial literacy is not a subject taught in schools, but it is one of the fundamental aspects that should be taught from childhood. This type of education will determine the practices and habits such as saving, debt, spending control and wealth creation that will be vital in adult life.
The results of many financial literacy tests show that 51% of the students assessed are at level 2, which is a very basic level in the development of financial literacy.
It is therefore essential to promote a culture of financial literacy at all levels of education and, at the same time, to have teachers trained to deliver more interesting campaigns aimed at children, young people and families, especially in low-income areas.
It is not enough to know what financial education is, it is also necessary to implement it. This will encourage savings and investment in financial assets, and encourage people and businesses to manage their budgets (taking out loans responsibly, preparing for financial risks, etc.).
Finally, it is hoped that financial education will encourage changes in the behaviour of the population, so that consumers act more confidently and responsibly for the benefit of their own well-being.
This is why Financial literacy is so important.
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