Financial literacy is the level of knowledge about finance, personal savings and how to manage them. In this article, we will talk about the basics of financial literacy that will help you become financially independent and competently manage your money. We may also see financial literacy infographic created by Edutopia here.
It’s especially important for freelancers to be financially literate. Unlike office colleagues, a freelancer does not have the same social security and must worry about financial health himself.
Fundamentals of financial literacy for beginners
There are five rules, the implementation of which will allow you to achieve financial independence:
- always spend less than you earn;
- try to buy what is more expensive;
- try not to buy something that gets cheaper;
- meet basic needs first;
- consider not only the item cost, but also the cost of its maintenance.
For example, it follows that first of all it is necessary to solve the problem with housing. Without your own real estate, it is difficult to start a family, survive in old age, etc. Buying an apartment or a house is extremely difficult due to high prices, so you need to acquire living space first of all.
You need to buy housing, which will rise in price in the future. Doing repairs is one that will help you sell the apartment as quickly and expensively as possible. Therefore, you should not do design repairs if you are not going to live in this apartment for a long time – when selling, design repairs will not pay off and may even complicate the the apartment sale.
On the contrary, spending money on buying an expensive car or traveling is the last thing when basic problems (housing, good education, health) are solved. In the case of a car, you need to look at the operating cost, not just the price of the car. You can “squeeze” funds out and buy an expensive car – and go broke on its maintenance (road tax, expensive repairs and service, accessories, etc.).
Where to start solving financial problems?
In addition to the basic rules, there are other rules and recommendations that will help you become a financially literate person and avoid common mistakes. Below there is information that will allow you to start effectively managing your personal funds. For convenience, we have made several blocks for each topic.
Should I take loans?
A loan can be taken in three cases:
- the means of production;
- healthcare purposes.
It is not recommended to take a loan for a car, entertainment, equipment (if it is not needed for work), clothing, etc. Credit cards should be used with extreme caution or not at all. A new loan can be taken only after the previous one is paid off. It is impossible to combine two, three or more loans.
The cost of an apartment and a car
The maximum value of the car should be the amount of income for 12 months. If you earn $4,000 per month, the maximum cost of the car will be $480. Such a car will be comfortable to keep it safe and will not become a financial burden. Anything that is more expensive, you buy beyond your means.
The maximum cost of housing is family income for 4 years. For example, if you and your wife get $4,000 each, your total income will be $8,000 per month. Income for 4 years will be at the level of $320,000. For this money, you can buy an apartment.
Any person needs to have reserves that can be spent in the event of force majeure.
- The minimum amount of reserves is 6 months income;
- Optimal – income for 1 year.
This amount of reserves will allow you to comfortably cope with temporary difficulties or change your profession if necessary.
If you are planning to have a child, the amount of reserves should be increased. You will not be able to fully work for some time, while your costs may increase significantly due to the addition to the family.
Typical financial mistakes
The basics of financial literacy can help you avoid common mistakes people make. You will not suffer from unbearable loans and think about how to pay back debts. Below we have collected popular mistakes that people make with personal finances:
I spend every cent
You spend whatever you earn. No reserves are formed. Housing problems are solved by attracting a maximum loan, which increases interest costs and lowers the standard of living.
I want – I buy
You often buy out of emotion and then don’t use the purchased items. Many purchases are made using loans, including consumer (personal) loans with the highest interest. You do not work for yourself, but for the banks.
I want and need the best
You basically want to buy a foreign-made car without buying a domestic-made car. You need a 3-room apartment right away, but a 1-room one does not suit you. You always want to buy what is not currently available, and you do not buy what you can really afford. Further events can proceed in two ways:
- you buy what you want, but on credit, and this credit ruins your financial state;
- you put off shopping until later, and as a result, you live worse than you could (you don’t buy your own, albeit small, apartment and live with your parents).
How to improve financial literacy?
- Analyze your income and expenses. Check what expenses you can refuse and, accordingly, how much to save. All expenses, including small ones, need to be optimized.
- Use special programs to fix income and expenses. For example, there are very convenient and functional apps that help to conveniently analyze all income and expenses.
- Save money and learn to invest it. In addition to bank deposits, you can invest in bonds, real estate, your own business.
- Use loans carefully. Try to pay off your debts as quick as possible.