You hear the term ‘financial literacy’ often, especially during talks of personal finance. In this article, we’ll break down the concept into five fundamental but straightforward pillars. We’ll share how to take advantage of these pillars, as well as some helpful tools to have.
What’s financial literacy?
Oak Financial Advisors Perth state that financial literacy is a collection of skills that helps you spend and use money wisely. Applied correctly, it can lead to financial freedom, a situation where you have enough passive income to cover all your expenses.
Pillars of Financial Literacy
There are four central pillars of financial literacy. Some sources may list more, but they all relate to these four, one way or another.
Savings are one of the pillars of financial literacy. The discipline helps you preserve money today for use tomorrow. Saving also gives you something to invest in and grow. For the most part, it requires a lot of commitment and delayed gratification.
Many people have trouble saving, especially low-income earners. It’s difficult to put funds away when you’re barely getting by.
If you find yourself in this situation, you can use tools like Credit Karma and Quizzle. They help you monitor your credit score, so you’re continually saving more than you’re paying in debts.
Before you start saving, it would be more advantageous to work on paying off your debts first, particularly debts with high interest. This way, you can save yourself from paying hefty interests that you could put into your savings instead. Also, being clear of consumer debts can prevent further problems when you start saving and managing your money properly.
Aside from paying off your debt, another essential aspect to keep your finances intact is to set aside an emergency fund. Many people find it difficult which one to work on first, whether their high-interest debts or emergency fund. Ideally, it’s best to be consistent in paying off your debts while putting aside even a small amount for your emergency fund.
Essentially, an emergency fund is an amount of money you’ve put aside to be utilized for future financial emergencies. Unemployment, medical emergencies, unexpected home or car repairs, and the like, are some examples of where you can spend your emergency funds. As a rule of thumb, your emergency fund should cover six months to one year of your regular household expenses, but you can start by setting aside at least three months’ worth of expenses.
Debit and credit
Speaking of debt, financial literacy also includes a solid understanding of debit, credit, and their advantages. Borrowing money allows you to play with more than you currently have. With smart investments and a solid payment plan, you can make a small fortune with your lender’s money.
However, debt is a tricky tool because it can also work against you. If you’re unable to meet your payments, the lending institutions will be unforgiving and won’t hesitate to repossess your collaterals.
Use tools like BillTracker and Prism Money to monitor your bills and debts. They ensure that you’re always one step ahead.
Investments are the very foundation of financial literacy. You can save up as much as you want and rack up smart debts. But then, without being investment savvy, you won’t get very far.
We can’t talk about investments without discussing compound interest. Compound interest is the interest on your interest. Imagine you invested $20 and got a 20% interest or $24. Reinvesting the $24 will earn you $28.8. Invest the capital and profit a third time, and you get $34.56.
Compound interest amplifies your capital as long as you keep reinvesting the profits. The trouble comes in having enough discipline to invest the money instead of pulling it out and spending.
Investing as early as you can is crucial to compound your profits. If you decide to save and invest your money in an investment that returns compounded profits, you’ll be able to grow your investment further. Use helpful compounding tools like a compound interest calculator to help you compute your potential earnings more accurately.
Luckily, there are tools like Morningstar and Acorns. These are investment management tools that make your journey to financial freedom a lot easier.
Taxes are unavoidable for any citizen of the United States. However, with financial literacy, you can take advantage of tax breaks and cashback policies. You may even be able to write off some of your expenses and pay little to zero taxes on them.
One crucial tool for staying on top of your taxes is Taxfyle (https://taxfyle.com). The resource contains valuable information and tools for anyone to use and stay on top of their taxes.