What Is The Importance Of Financial Literacy?
The importance of financial literacy lies in the fact that it will educate you to make informed decisions.
How will financial literacy help you in managing your income?
There are three steps in financial literacy to be considered in context of managing your income:
I. Budgeting: Prepare a budget of your expenses and future goals by dividing them into the following sub-heads:
- Necessity: such as rent, electricity, food, etc.
So firstly, you need to save a part of your income to these heads that are necessary for your livelihood.
- Emergency: such as medical emergencies, financial troubles, etc.
This is an uncalled situation and a part of the income should be locked-in here.
Sound financial literacy can prevent this from happening by providing you the ability to deal with unforeseen circumstances.
Later in this module, we will understand how funds for such emergencies can be saved in a well organized manner and also learn about budgeting.
Short-term goals – such as children’s education, vacation, buying a car etc.
- We all have small desires at various corners of our heart. Now these desires are nothing but short-term goals.
- You should keep a part of the funds for this goal.
Long-term goals – such as buying a home, going on a world tour etc.
- No doubt these dreams are big, but nothing is impossible.
- If you consistently save for a given time period, you are sure to reach where you want to be.
Leisure spending- such as spa, going to hotels, movies, parties etc.
- Whatever amount is residual shall be your leisure spending money.
II. Save with consistency:
- Now in step 1, we have mostly discussed step 2, i.e. saving.
- Saving will be fruitful only when it is accompanied by consistency.
- You need to be consistent with the amount you are saving. This will help you develop a habit of keeping that particular sum aside for a predetermined purpose
- Now this saving does not mean, just keeping your money in your home locker. It means saving for the next step. i.e. investing.
III. Invest with information:
- Investing means nothing more than growing your money.
- Also, investing doesn't simply lock in your money into any short-term or long-term instruments.
- It means investing with information that aligns your financial resources to financial goals.