3 Essential components for financial literacy

According to Experian—a renowned credit bureau—the key components of financial literacy are:

1. Budgeting

2. Saving

3. Managing debt

Having a proper grasp of these concepts means that you should be able to make good personal financial decisions in your life that will put you on the path to greater financial security. 

In this blog post, we'll delve into the three fundamental elements of financial literacy and offer some useful advice on how you can improve your financial management abilities to more effectively handle your personal finances, contributing to your financial security.

Budgeting

A common misconception when it comes to creating a budget is that it is solely a tool for individuals who are struggling to make ends meet or who find themselves in financial distress. This perception can lead many to believe that budgeting is a sign of financial failure or a lack of wealth. However, this viewpoint is fundamentally flawed. In reality, a budget is a powerful financial tool that can benefit anyone, regardless of their financial situation.

When used correctly, a budget serves as a roadmap for managing one’s finances effectively. It provides a structured approach to tracking income and expenses, allowing individuals to gain a clearer understanding of their financial situation. By clearly seeing where money is coming from and where it is going, a budget empowers individuals to make informed decisions about their spending habits.

One of the primary advantages of budgeting is that it offers greater freedom and control over one’s financial life. With a well-constructed budget, individuals can prioritise their financial goals, whether that means saving for a vacation, investing in education, or planning for retirement. By allocating funds to specific categories—such as savings, necessities, and non-essential spending—people can ensure that they are not only meeting their immediate needs but also working towards their long-term aspirations.

Moreover, budgeting can help individuals identify areas where they may be overspending or where they can cut back. This awareness can lead to more mindful spending, allowing for better financial choices that align with personal values and goals. For instance, someone might realize that they are spending a significant amount on dining out and decide to allocate more of that money towards savings or a special project.

Embracing budgeting as a positive practice can transform one’s relationship with money, making it a valuable asset in achieving both short-term and long-term financial success. It is intended for people of all income brackets.

And, an individual who budgets wisely is a sign of a financially literate person. 

So, how do you budget correctly?

What the correct budget is will depend on your unique financial situation. However, there are a couple of widely-known budgeting approaches such as:

The 50/30/20 budgeting approach

With the 50/30/20 budgeting approach, 50% of your income, is allocated to essential living expenses such as housing, utilities, groceries, and transportation. Think of these as your essential costs.

The second category, making up 30% of your income, is set aside for any wants or non-essential things. This includes non-essential items and activities that enhance your lifestyle, such as dining out, entertainment, hobbies, and personal care.

Finally, the remaining 20% is dedicated for savings and debt repayment. This portion is crucial for building your financial future, whether it’s saving for emergencies, investing for retirement, or paying down existing debts. By following the 50/30/20 rule, individuals can achieve a balanced financial plan that supports both current enjoyment and future security.

Interested in learning about more budgeting approaches? Read this blog post. 

 What do you do if a budget doesn't help you?

If you find that regardless of the budgeting approach you use, you still end up short of cash, you may not have a budgeting problem, you may be over-indebted and have a cash-flow problem. 

The simple definition for over-indebted is that too much of your income is being used towards servicing debt. If you are struggling to pay all your debts every month you could be over-indebted. This can be very frustrating especially if you've already tried to cut expenses to make your budget work. 

But, there is hope and a way out of this. With debt review at Meerkat, we can reduce your monthly debt repayment by up to 50%, finally giving you the breathing room you may need. 

Read this blog post to find out how debt review works. 

Save Money

A core component of financial literacy is your understanding of the importance of saving. Particularly, when you're starting out, the importance of saving towards an emergency fund. Having a dedicated savings account for this can be useful because then you won't be tempted to dip into your savings prematurely.

An emergency fund acts as a financial safety net, providing you with the means to handle unforeseen expenses or financial setbacks without derailing your overall financial stability. Whether it's unexpected medical bills, car repairs, or job loss, having an emergency fund ensures you are prepared for life's unpredictable moments, thus offering peace of mind and a sense of security.

Establishing this fund is a fundamental step in building a strong financial foundation, allowing you to focus on long-term savings goals like purchasing a home or planning for retirement. Therefore, prioritising saving early on is essential for achieving financial independence and resilience.

Moku tip: don't focus so much on the amount you are saving initially, focus instead on building a habit of saving.

To determine if you are financially literate, you can conduct a simple evaluation by assessing if you are budgeting effectively, managing your debt and its repayments efficiently without overextending yourself, and actively working towards establishing an emergency savings fund.