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Key Components of Financial Literacy

Financial literacy is not something fantastic, it's just knowledge of some principles. They are not a secret, and in many specializes books you can find some excellent advice. However, here we cannot do without an integrated approach, because the half-measures cannot produce the desired result.
be-in-the-loop - Key Components of Financial Literacy

Financial literacy is not something fantastic, it’s just knowledge of some principles. They are not a secret, and in many specializes books you can find some excellent advice. However, here we cannot do without an integrated approach, because the half-measures cannot produce the desired result.

We have collected most of these tips in this article and we will discuss each one separately. But to start with, let’s talk about why so many people are financially illiterate. Or rather, about the excuses that people make up for themselves.

It’s all about how we look at the accumulation of wealth. For example, you may have many constraints on the money issues that has been formed in your psyche for many years as a result of upbringing or traumatic events.

be-in-the-loop - Key Components of Financial Literacy

Immediately you should say that beliefs affect how you look at money – both for the better and for the worse. Here’s how they can be:

◦ Money is the root of all evils.

◦ It is necessary to work hard before pension to become rich.

◦ To make money, you need money.

◦ I’m not smart enough to be rich.

These beliefs are deeply rooted in the psyche and often prevent us from making the right financial decisions.

How to learn to manage money

  • Start Keeping a Budget

This is the basis. The budget is not only a record of income and expenses, but also a plan for saving and investing money.

Many financial experts believe that the budget should be managed according to the principle 60/30/10:

◦ 60% of income should go to your needs;

◦ 30% of income should go to your desires;

◦ 10% of income should be saved.

However, if you want to become financially independent, you need to put yourself in more difficult conditions. For example, the budget might look like 50/10/40 and even 50/5/45. It all depends on the conditions of your life, on income and expenses.

Of course, you need not only to keep records, but also to manage your finances. The following information is about this.

  • Minimize Monthly Expenses

It should become a habit. Once a week, think about what expenses can be reduced. At the same time, it’s important to be in a good mood and not to think that you are sacrificing. Turn the process into a game.

Here are three key questions that will help to adhere to this rule:

◦ Do I really need this?

◦ Can I do without it?

◦ What are my options?

be-in-the-loop - Key Components of Financial Literacy
  • Save Money

The more money you have saved, the stronger your financial situation is. To correctly think in this respect, ask yourself the following questions:

◦ Why do I want to start saving?

◦ Why is this important to me?

◦ What are the long-term consequences of such a habit?

Let’s talk about it a little later.

  • Spend Only Your Money 

No matter how hard the advertisement assures you of the benefits of the next loan proposal, even if you need to take advantage of them – approach it prudently.

It is not necessary to take a debt and dispose of someone else’s money. This habit leads to wrong thinking, and even to a debt pit. We will also talk about this later.

Create a Financial Cushion

the financial cushion should be understood as the amount of money that you could live for 6 months in case you lose your job or all sources of income. This time is needed not only to find new employment, but also to find yourself, develop skills, learn, and read.

Some people create the financial cushion just in order to temporarily withdraw from business and engage in self-development or, for example, write a book. This is also a great solution, just remember that going back is not too easy.

It’s easy to calculate the financial cushion, although some people use long formulas. Find out how much money you need to live a month – just count the costs over the past six months and bring out the average. So you get an approximate result.

Of course, the financial cushion does not take into account inflation, price rise and unforeseen circumstances, so it is more appropriate to attach a reserve fund to it. Here you are free to decide if you want to create it and if so, what amount should be included in it.

be-in-the-loop - Key Components of Financial Literacy
  • Set Your Financial Goals

Psychologically, it’s very difficult to set aside or save money if you do not have any goals. The question constantly arises in my head: “Why do I suffer so much?” Not finding an answer, you give up.

So set yourself financial goals. Here are some examples:

  1. Financial independence

This means getting a passive income to become independent on work. You can quit work and live happily for the money that goes into your pocket.

How much money do you need per month to feel good? Write down this amount. After that, start thinking about what you need to do to get this passive income.

2. Financial coverage of basic needs

This is a simple goal: how much money do you need to cover all your monthly needs and save a certain amount? For example, you earn a thousand dollars, of which you save two hundred dollars each month. Spend the rest. If this is enough, you are financially protected and able to feed yourself at this stage of life.

3. Financial Security

This is a certain amount of money that will allow you not to depend on other people. It is necessary if you want, say, to go to India for a year to get acquainted there with the culture of this country and to indulge in spiritual practices. What amount of money do you need for this to get fired and not to borrow money?

We previously wrote about the financial cushion and a reserve fund. These are also goals that you can and need to set yourself.

In order to learn how to manage money, you need to start saving it. We will devote a separate section to this issue.

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