The Fundamentals of Financial Literacy

The key components of financial literacy

Financial literacy refers to a basic understanding of money and its four pillars: debt, budgeting, saving, and investing. It's knowing how to use the power of these foundations to create wealth over the course of one's life.

Simply put, financial literacy is the difference between living paycheck to paycheck and being able to afford the things you want and need, as opposed to creating wealth that works for you, which is why it is so important.

Many customers have a basic understanding of economics, credit, and the long-term financial consequences of bad financial decisions. In reality, one of the key reasons many South Africans struggle with saving and investing has been identified as a lack of financial understanding.

Financial literacy refers to the ability to comprehend and apply a variety of financial concepts and skills, such as personal financial management, budgeting, and investing. Financial literacy is the bedrock of your financial partnership, and it is a lifelong process of learning.

Continue reading to learn how to become financially literate and capable of navigating the difficult yet vital waters of personal finance. 

Debt Management

Debt is money that isn't yours that you invest. You are collecting debt whether you borrow money from a bank, use a credit card, or take out a short-term loan, such as a payday loan.

Although debt is regarded negatively, it is important for most people because only the extremely wealthy can afford to pay cash for a home, car, or school. The first lesson here is to know the difference between good and bad debt and to stay away from bad debt as far as possible.

Money lent for items that are absolutely important for making a life, such as a home, and for advancing your money-making potential, such as education, is called good debt.

If you're investing to buy a depreciating asset, it's usually called bad debt. To put it another way, you shouldn't go into debt to buy anything that won't increase in value or produce revenue. For example, buying a car or clothes. 

Find out more about how interest and savings affects your debt by clicking here.

Savings

Saving is an important part of achieving financial stability, a stable now, and a bright future. Wealth is created by investing less of your income in order to pursue the following goals:

Realise essential goals, such as sending your children to university, paying off your mortgage, and/or enjoying your retirement.

Create an emergency fund to deal with life's unexpected events, such as home or car repairs, sickness, or job loss. This should cover three to five months of expenses.

Treat yourself to the things you really like every now and then, such as an exotic vacation or a new sound system.

Read more about how compound interest can grow your savings exponentially by clicking here.

Budgeting

Budgeting is the ability to prepare and manage your finances throughout your life. You can build an actionable plan to spend less by reducing needless expenditures and saving more for the things you need if you know exactly where your money goes each month.

Money coming in (total income) should always be greater than money going out, according to the law (your total expenses). The difference between the two figures is what you can put together as a savings account.

Budgeting allows you to prepare for short-, medium-, and long-term expenses and invest appropriately so that you can cover all three. As a result, it is absolutely important for financial stability and freedom. 

Investing

An asset or object purchased with the intention of producing income or appreciation is referred to as an investment. The term "appreciation" refers to an asset's value increasing over time. When a person buys something as an investment, the aim is not to consume it but to use it to generate wealth in the future.

This involves, for example, the buying of bonds, stock, or real estate property.

Learn more about the difference between high-risk and low-risk investments by clicking here.