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What are the Key Components of Financial Literacy?

Not everyone is born with a golden spoon in their mouth where “financial liability” isn’t part of their lifestyle. Millions of people worldwide work hard and strive to have some form of income to save for later usage.

It’s the managing income part that scrutinizes the way people live their lives and how much they can set aside for other needs. Being financially literate isn’t enough but implementing the same in your day to day activities is all the more important. It makes the person grow economically and helps them get through financially cringing times effortlessly.

So, embedding the basics of financial literacy in your lifestyle is equally essential. Gathering in-depth knowledge on finance, high return investment strategies, tax benefits etc. can pave the way for more significant changes in improving your financial health.

Thus, without further ado, for those striving to become financial laureates and attain literacy in the said field, we have some key pointers that you should look out for.

Importance of Financial Literacy

Hold on, before we move ahead, imagine this scenario. You have a dream of owning a luxurious car that costs a pretty penny. However, in contrast to your income, its possible only by saving up for a few months or may be years.

Adding to this, you have debts and other loans to pay off as well. Looking at the scenario, you might be thinking that many things have to be readjusted in that person’s life to fetch that dream car.

Financial literacy helps in these readjustments to take place by distributing your earnings wisely and ensuring that you have perfect disposal of money that would reward you greatly in the long run. 

Key Components of Financial Literacy: Tips for Beginners

Here are the crucial components of financial literacy that you must know:

1. Baby Steps in Budgeting 

Consider budgeting like the slices of pizza. The entire pizza is your income, and every slice represents the diversification of your income. Though a pizza might be segregated equally, your income should, but only on the basis of necessities. The most critical aspect is dividing your income based on your bare essential needs. You have to keep in mind that giving importance to your daily requirements and leaving the rest for savings is a reasonable budgeting plan.

Budgeting can vary significantly based on your monthly earnings, lifestyle, and many such factors. Taking debt, taxes, and other expenditures into consideration, budgeting should be done accordingly. From the money you earn, try to invest a bit and save up as it comes in handy for all future requirements. 

2. Managing of Debts 

Debt is one critical part of any financial literacy you are trying to master. If you have availed a personal loan or any other form of debt, focusing all your plans on paying it off is of utmost importance. Never try to prolong it for an extended period as it would mount up to vast sums of money to be paid in the end. However, with accumulating debts, you would have to keep some collateral in exchange for financial support. 

Under the topic of debt, further different aspects come into the picture like:

i. Secured Debts

Under this form of debt, the collateral given in exchange for financial support will serve as its collateral. What it means to say is that if you are looking to buy a house, then you would have to take a home loan if you don’t have enough cash to buy it instantly. For the same if you don’t pay off the loans, then the house could be recouped and sold at a higher price regaining the money lent. In this type of debt, the interest rate is lower.  

ii. Unsecured Debts

The debt in which there is no collateral given; however, the interest rates in paying off the debt are higher. Credit cards are the perfect example where you are given a particular sum of money to spend. However, when you repay the amount, the interest rates are incredibly high as there is no collateral given if the amount used isn’t paid back to the bank.  

3. Savings 

Savings are generally defined as the excess lump sum money left out after all necessary expenditures are met. Savings is one such factor where people have mixed feelings about whether or not it should be done. For many, life depends on savings where they can buy something huge or pretty expensive after a specific amount of time. Others have a notion of spending everything at that time and depend on the next paycheck for survival. 

The pandemic in 2020 is the perfect example where savings helped many people to pull through the months of lockdown imposed in several countries. The surplus money that you might have in your account from your paycheck could remain in the bank. You could convert it to an FD; the interest rates are relatively higher than the amount deposited for the fixed deposit. 

4. Investments 

A significant part of taking nascent steps into the world of financial literacy are investments. There are so many platforms where the money you earn periodically can be put to good use to avail greater returns. These include the stock trading platforms, investments in gold, real estate, etc. Especially if you are looking for a great retirement plan, you could do so by keeping some amount of your income for pension policies. 

An excellent investment with recurring returns could be a good option to enjoy a relaxed life later on. Furthermore, if you are looking for high risk-return investments, then the stock market is a perfect place. For a stable investment over a long period, then invest in gold or real estate. Do consult a financial expert before opting to invest in your desired investment alternatives.

How to Gain Financial Literacy?

Achieving financial literacy takes time. Understanding and having patience does pay off in the long run. 

However, if you want to get better, other than the above-given steps, check out different podcasts, read financial newspapers/magazines about financial recommendations, take up financial literacy classes, etc. Though these aren’t the only ways to broaden your financial literacy. 

These are just the initial small steps in the right direction. More experience can give you broader insights on how you can stabilize your income, ensure that you have a comfortable life free of debts. And, enjoy financial freedom!

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