Financial literacy refers to the knowledge and ability to understand money on how it works and how it can work for you. The main goal of financial literacy is to educate people to spend less than their income, to understand the concepts of saving and investing to achieve financial independence in the future. Financial literacy is necessary for people in all ages since all of us involve in using money daily for our whole lives.
By obtaining financial literacy, it will help you to:
When you are financially educated, you will know how to allocate your income and expense wisely and avoid overspending which may lead you to fall in debt. You are conscious when you make financial decisions. Before spending your money on something, you will consider the priority or necessity whether the items you want to buy is worth your money or not. Furthermore, you may find other sources to generate more income for you, for example, saving at the bank to receive interest, setting up a new business, investing in stock market, and so on.
Needs refer to the items that human requires for surviving, for example, food, clothing, shelter and health care. Wants refer to the things that one desired to possess, for instant, luxurious clothes and vehicles. We don’t really need it to survive, but we just want to own it to fulfill our desire. By knowing the difference between what you need and what you want, you learn to manage your money better and adjust your expense according to your priorities, as well as start saving and investment for better.
If you have family, you should make the financial plan as the family plan and discuss about it with your partner and children. This will encourage your family members to participate in family plans and build saving plan together. Moreover, it will teach the value of money to children and encourage them to start saving for their future.
Assets are tangible and intangible items that you own and can sell in cash, for example, house, savings, vehicles, lands, stock, etc. On the other hand, liabilities refer to money that you owe others, including long-term and short-term debt, credit card, installments bills, loans, interest expense, etc. Many millionaires recommend that the assets we own should be used for generating wealth, rather than enlarging the amount of liabilities which leads to more expense. For instant, you should use a portion of your savings to invest in stock market or run a business which will earn you more income. Instead, if you use your savings to purchase modern car, you have to understand that after you spend money on that car, it will start losing its value from the moment you drive it out of the car company.
The main idea of investment is to use money to generate more money for the future. Besides depending on one source of income, those who are financially educated will seek for the opportunity and potential of any sector to invest for extra source of income or passive income. By recognizing many investment methods, you will have the ability to understand about the gains and the risks of investment which will facilitate you in your portfolio diversification.