How to be financially literate
We all make money in different ways and means, but very few know the art of growing mone Be it great intelligent personalities like Chanakya, Warren Buffet, Robert Kyosaki – each of this personalities is from different geographical backgrounds, but all speak about some common aspects, which average human beings hardly try to adapt in their daily lives.
The moment we listen about economics or balancing the income expense ratio concept, we all feel it’s something insanely complicated to understand. But readers, isn’t it the most basic and essential thing we all should know or be aware off? Irrespective of the background you belong to medical, architecture, engineer, dancer, any professional who aims to grow high in life need to understand how to manage finances, i.e. be financially literate.
You will say, I will grow high and then appoint a Chartered Accountant to manage my finances. Big deal!!! But don’t you think you should still know the basics of it? Here I am, to make it simple for you.
Financial literacy is nothing but having complete control of your finances. Primarily even if you using your logic and common sense, it’s a high starting point for a beginner.
You will get many reading materials, videos on this topic giving you many tips and advice which are either complicated or impractical in some or the other way. But we are here to know the simple and practical tips to be financially literate.
Difference between assets and liabilities
The significant difference between rich and the average person is their approach towards assets and liabilities. Unlike taught in accounts for commerce background students, the concept of assets and liabilities is slightly different.
Assets are something which can generate additional income, which liabilities do not have.
Average person always spends their money behind liabilities like a house, possessions like electronics, vehicles, which are again on loan. At the same time, rich people prefer utilising their money behind assets like investing in business, stocks, shares, property which can generate additional income for them. They buy other possessions after generating income from the above assets.
You need to be mindful of your income if you want to be secured. This simple calculation can hold good for anyone, whether it is employed or into the business. It is advisable to follow the 50-30-20 ratio in your daily lives when it comes to managing your finances.
Fifty per cent of your income should be utilised to meet your needs. Needs are the necessities, and you can’t do without them.
Thirty per cent of your income should be utilised to address your wants. Wants are those additional expenses which you incur in various areas like shopping, outing, food, luxury etc. These are those wants which are driven by our instincts, emotions etc. We can live with or without buying them.
Twenty per cent balance income should be strictly your savings. These savings are very crucial as they play a vital role in many unexpected and unplanned situations. Our goal should always be to save more than 20 per cent of our income.
Save and invest
If you understood savings as not using the money and keeping then your lockers dead and unutilized, then it is not financial literacy. Money has to utilised to grow. Otherwise, its value decreases. You have to save your money but invest it in the right way. You may invest your savings in mutual funds, stocks, bonds, fixed deposits depending on your ability to take the risk. You need to ensure that some portion of the money is invested in such place, where you can easily withdraw during urgency (which is called liquidity in financial terms)
Limited use of credit card
Our instincts and emotions are so strong that they compel you to make some foolish decisions in life.
Having a cool lifestyle and luxury is the trend of today. Social media today is flooded with images of your friends going to different destinations abroad, wearing branded clothes, partying to most expensive restaurants and bars, which instigates you that why should you be left behind.
There comes this demon a tiny miny credit card with various cashback offers which block your mind at times to even calculate and think whether it makes sense or not.
I do not mean that credit cards are waste. It’s we, the users who should wisely use them. Credit cards give you’re a fantastic facility to buy things when you need, even if you cannot afford to pay the total sum on that day. But it is remarkable how you use it. Don’t forget that even credit card companies are also here to do business.
Save for the wrong time
There is nothing harmful in being prepared for the worst. Health insurance (Mediclaim), life insurance, setting aside savings for bad times are very crucial irrespective of how much you earn. Richer you are, higher the stake of bad times you may have to face.
Stay away from show-off culture
I already mentioned a bit of this in the second pointer on credit cards. Show off culture is the biggest reason for illogical spending. That does not mean that you should not go for outings, not shop etc.
But you do it all only because you need it or you want to do it. Just because someone else has spent or bought something doesn’t mean you have to follow the same. Sometimes we only spend to show off, but that is totally against being a financially literate person. Spend wisely, and that is not being a miser.
Money makes more money
The thumb rule is that only money can make more money. Only if you wisely utilise your money, then can you generate money out of it. If you have extra funds (savings or surplus funds), you should invest it in something that can make more money. You can invest it in some business venture too.
Find ways to get what you want
Dreaming big is always good. The sky is the only limit which applies to money as well. Financial literacy will never ask you to cut down on your wants. Earn big and then spend big is the mantra.
If you dream of holidaying abroad, you have to work hard to ensure that you afford the same. Your brain will start working in the direction of your dreams.
Finally, to conclude, this was the basics of financial literacy. There is a lot to go into detail, which can be following by my future blogs depending on your response. Till then, happy reading!!
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