In spite of the fast economic growth of most countries, financial ignorance among global consumers remains alarmingly high. A 2016 OECD study revealed that more than half of the world population does not know how to handle money wisely or what financial terms like compound interest mean. This could pose as a potential problem for those who have managed to acquire new wealth; they might still face poverty risks if they mismanage expenses, ignore savings, and accrue unrealistic debts.
Being financially literate allows you to live comfortably and meet financial goals easier because:
- You have better self-control. Having intricate knowledge on the state of your finances (not just cash) will enable you to determine exactly how much you can spend. This prevents you from going overboard with online shopping and unnecessary expenditures.
- You make better choices, especially in terms of which investments to make, what mortgage to apply for, and how much to save and spend. You actually know how each of these transactions will affect you in the long run.
- You have a better quality of life. Let’s face it, you can’t gain assets and live on a certain standard without money. Being financially literate means that you know where to find more sources of income and how to save for the rainy days.
- You gain financial independence, especially if you are a starting professional. Eventually, you need to learn how not to depend anyone else when times get financially rough.
What to Do
1. Increase your net worth. Start by listing all your assets and liabilities. Have a healthy net worth by gaining more assets. If this is not the case, you need to cut down on some expenses and avoid getting loans so you do not spend beyond your means.
2. Make the 3S’s a habit: save, spend, and share. There is clamour for parents to teach this simple exercise to children so they will be wiser with their money when they grow up. These S’s are not interchangeable: when you receive your income, allot 40% to savings first; 50% is for spending, and the remaining 10% is for sharing. Make this instinctive — you will thank yourself later when you have extra cash you can easily access in times of need.
3. Have a budget. This is non-negotiable. If you do not have a clear grasp on where your money is going, you won’t know if you are financially healthy. Your budget will force you to create spending priorities — and sticking to those priorities — so you won’t sink into debt.
4. Pay debts. Before you start thinking about gaining more assets, clear up your debt first. They have higher interests so they needed to be taken care of immediately. Also, be strategic with your mortgage. Mortgage was created by humankind for a reason, and this is to allow some individuals to acquire property within their financial limitations. Be careful when choosing a lending institution since you might end up with one that charges too high, making the investment you are loaning for not worth it.
5. Diversify assets. Ideally, you must invest a portion of your income to increase your asset base, but this doesn’t mean putting all your eggs in one basket. The beauty of diversification is that you also diversify risk. You remain financially secure even if one of your investments fails. If your income does not give you enough flexibility to diversify your investments, you can start with building your emergency funds first. You can proceed with short-term but low-risk investments, like federal bonds and real estate. If you have a higher comfort level for risk, you can start making long-term investments like stocks and bonds.
6. Assess your financial standing. This needs to be done regularly, especially if you have variable-rate mortgage payments that fluctuate from time to time. This will help you anticipate possible changes on your expenses and prepare for them. Additionally, keeping track of your progress will help motivate you to keep rebuilding your portfolio based on how the global market is faring.
7. Seek financial advice. Not all financial decisions can be done by yourself, especially if you are still starting out. You might end up applying for mortgage with unrealistic rates or making risky investments that will backfire. Be more strategic with where your money goes by asking for input from a financial consultant. You worked hard to earn that cash, after all.
8. Get insurance. With how volatile the markets are, it is better to protect your investments than deal with damage control. Get health and life and insurance, and while you’re at it, property insurance, as well. Start by thinking about all the properties you have and how much it costs to replace them. Consider hospital bills you need to pay if you get sick. Insurance can help you cover those costs without breaking your savings.
9. Diversify income. Aside from your salary and investments, put your unique skills to good use. Instead of shopping, use your time doing something else that will help you earn more. There are many online jobs that allow you to work flexible hours; capitalize on that.
10. Continue to set goals and have a rewards system. Just like dieting, you need to set financial goals to motivate you to keep that spending discipline. Make one-day indulgences to reward yourself for a job well done. After all, you are controlling how much you spend for now so you can use your saved money for something more valuable in the future. Be careful with your splurges though; treat them as one-time things so they continue to be rewards and not a basic part of your lifestyle.