Warren Buffet says that he learned his most important lessons about money at an early age from his father. That is why Warren Buffet launched an animated series on financial literacy for kids and their parents ‘The Secret Millionaires Club’. Each episode the four friends get wise business advice from their mentor as they encounter money problems becoming more and more sophisticated. Actually, it is hard to overestimate the benefits that knowledge about finances brings people.
What is financial literacy
Just the same as we need legal literacy to know our rights, we need financial literacy to know our benefits.
Financial literacy is not being taught at school or university. It is not a science that can be understood only by professors, but a basic knowledge about how money works in the modern world. To be financially literate means to know what are the most important instruments that exist on the financial markets and to use these instruments properly. In that case you will be guided successfully through a variety of possibilities and make the right decision concerning your personal finances.
The basic principles of financial literacy
The outlines of financial literacy are budgeting, personal capital management and investing.
Your budget should consist of 4 categories:
- the income that you get in the form of salary, banking interest, gifts etc;
- fixed expenses which you cannot avoid, such as rent, alimony, loan payments;
- discretionary spendings for entertainment or pleasures;
To control your budget you have to make a balance sheet. A balance is a mathematical difference between your income and spendings. If your income prevails, you have a positive balance, which is perfect. Otherwise (if you are in minus), you have a negative balance. In that case you have to analyze your balance and correct it.
To manage your capital effectively you need to know your debt structure. First thing, get your credit report which can usually be obtained for free once a year. Calculate the total sum of loan payments per year. If you see that you do not have enough resources to pay the interest, address your bank for a restructuring program. Otherwise you will be surviving from paycheck to paycheck without a possibility to manage your capital properly.
Investing is the most important of these three principles because it allows you to receive additional income. Which in its turn will help you to reach your life goals, such as getting a better education or raising your life level or quitting a job and starting traveling. In other words, only if you get additional income will you stop surviving day by day and start moving to your dream.
Benefits of being financially literate
- You will never again be under financial stress. Once you have learned how to manage your money you will always know where every penny is, what expenses you have to cover and what earnings you will get. No need to be in an emergency about unexpected spendings.
- With your new financial knowledge you will learn the right way of saving your money and investing it. You will be able to tell the risky ways of investing from the reliable and safe ones that can assure a secure financial future for you.
- No more financial losses as a result of insufficient knowledge about banking products or tax reward opportunities.
- Your life level will be raised because of your better knowledge of financial issues. You will have more opportunities to earn as you understand how money works and you will be able to protect your capital better.
- You will be able to understand financial matters and speak about them freely either with your boss or with your business partner.
- You will be able to find new profitable ways for your personal business.
- Achieve your goals with your higher level of financial literacy. Your friends and relatives will be impressed with your progress. Consider the possibility of opening your own course of financial literacy and start teaching others!