An
investment in knowledge always pays the best interest.
Benjamin Franklin
According to Wikipedia, financial literacy is the ability to understand finance. More
specifically, it refers to the set of skills and knowledge that allows an
individual to make informed and effective decisions through their understanding
of finances.
It implies that you have to get financial education
by studying financial information, understand
it, do it and obtain valuable experience. You are likely to make financial
mistakes along the way but you will be wiser.
There are three stages in life to learn about
relevant financial issues:
At home:
Financial education starts at home for the kids.
Savings: It is the best time to educate your child
about savings and how your money grows with compound interest. It is also a good thing to talk about the
simple rule of 72 (the time needed to double your money with a fixed annual
interest rate. At 6% you will double your money in 12 years - 72/6) in relation to savings. Take the opportunity to talk about save-and-buy-later for a big-ticket item when he or she is about to buy an expensive item like a laptop or
an electronic dictionary. To save and buy later is a concept on effective use
of money and avoid paying more on interest and getting into debt.
In school:
In secondary school:
Education loan: When your child is about to enter
college, polytechnic, or university, it is also a good time to talk about
student loans. Getting a loan to pursue tertiary education is not the best option. Think about it, before you get
a job you are already in debt and there will be more debt to incur like a car
loan and mortgage. It is good to obtain a degree but there is no assurance that
you will get a decent job of your choice or a job at all upon graduation.
Higher education:
Debit cards: It is good for you to have a debit card to gain knowledge and valuable experience of using plastic
cards. The card is tie to your saving accounts and each time when the
card is used the amount is deducted accordingly from the account. There is no
way to spend more than what you have in your savings account.
As a young adult:
Needs and wants: Landing on your first job after
graduation is a great achievement. Getting your first paycheck is a delightful
thing and you are thinking of buying so many things. So it is time to learn
about wants and needs, budget and living within your means. Needs are essential
and wants are optional and you can go without.
A budget is a way to control spending so that it is less than what you
have earned and there is still money left over every month to save for a rainy
day.
Good debt and bad debt: It is also important to
learn about good debt and bad debt. Getting into debt to buy what you want is
bad but getting a mortgage to buy your first house is OK because a house
appreciates in value over time. Getting
a car loan is bad but how many of you can buy a car in cash? A car depreciates
greatly in the first two years. The
outstanding loan may be more than the value of your car.
Credit cards: You will also acquire your first
credit card. It is crucial to know the
danger of bankruptcy relating to young people and credit cards. Wise use of
credit cards is about applying the knowledge of wants and needs, following your
budget faithfully, and paying the outstanding amount fully and promptly. The
most important thing about credit card usage is for convenience and not to
obtain credit and get into unmanageable debt.
Creditworthiness: Smart use of your credit cards is
an excellent way to establish your creditworthiness. The key is paying the
amount in full when you receive the monthly statement from the card issuer. It
tells the financial institution that you are a financially responsible person.
You are in good financial standing to grant credit because you pay promptly.
Net worth, assets, and liabilities: Next you will
learn more about your net worth, assets, and liabilities. Your net worth is what
you own less what you owe. Let’s look at
an example and simplify the issue for education purposes. One of your valuable
assets is your house. It is worth, say 200,000. Does it mean that you own an
asset with a value of $200,000? No, because you have taken a mortgage and you
still owe the bank say, $100,000 (which is a liability) and if you sell the
property you only get 100,000 after paying the bank off. So your net worth for
your house is only $100,000.
Emergency fund: It is important to incorporate an
amount for savings into your budget because if you are thinking of saving what
is left, there will be nothing left. One
important thing about life is to save for major unexpected expenses such as car
repairs, medical bills, and the like. That is why it is called an emergency fund.
Car loan, mortgage, marriage, and family: It is also
time to plan for the down-payment for your first car and your home. Think
also about the money you need to get married and start a family of your own.
Insurance: The subject of insurance is vital for
financial education. Learn to leverage insurance to reduce the impact of
personal disability due to sickness and accident. You also need to cover perils
such as fire, flood, and theft against damages done to your property.
Tax: Tax is one thing you cannot ignore. Learn to
take advantage of tax deductions to reduce your tax liability.
Investment: How do you get money for investment? It
is from your savings accumulated over time. You have to learn the different
vehicles to invest such as stocks and shares, unit trusts, bonds, gold, and
property.
Retirement and children’s education: You invest with
a major purpose. It is for your retirement when you are no longer working and
there is no regular income. It is also essential to grow your wealth to meet
your children’s education needs. It is always prudent to start early to save
and invest for your future because a smaller amount is needed to get started.
Wills: The last thing to know is the creation of
wills to distribute your wealth according to your wishes in a hassle- freeway
when you are no longer around.
Financial education is a lifelong learning process.
The most important thing is to avoid gambling and get rich quick schemes. The
ultimate aim of personal finance is financial freedom.
Related posts:
Gaining financial literacy is definitely a lifelong process, and I believe parents need to be very involved. I like sites such as http://www.bankaroo.com--they let me work with my kids to set goals and track funds. Because technology is increasingly a part of finance, I think using the site is a more modern way to educate on the basics.
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