What is Financial Literacy – 7 Basic Principles

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Financial literacy – can you speak the language of money?

Everybody talks about financial literacy but what do they mean. What are financial literacy principles and when do you know if you are financially literate. Like any other literacy you can never know enough. The more you know the better you will be.

Financial Literacy

The definition according to Investopedia is

Financial literacy is the ability to understand and effectively apply various financial skills, including personal financial management, budgeting, and investing. Financial literacy helps individuals become self-sufficient so that they can achieve financial stability.

That sounds like a decent definition. Basically this means that you can read and understand everything related to personal finance. All the jargon, the different options, the calculations and the key principles. So what are those basic financial literacy principles that you should understand.

Basic Financial Literacy Principles

Financial literacy principles for personal finance are not that different from financial principles for business. If you can think of yourself as a business then many of these principles will start to make sense.

The purpose of a business is to sell a product in exchange for money. This has to be done in such a way that you make more money than it costs you to make the product. The end goal is to make the company profitable so that it can grow bigger and better.

You can apply these principles to your personal finance. You should be able to make money and accumulate money to become financially stable. Knowing how to do this is your responsibility as an individual requires a certain amount of financial literacy. There are some basic principles that you need to understand.

Know how much money you earn

  • What is your cost to company or gross salary, what is net salary?
  • How much tax are you paying?
  • Do you have pension fund, what are the contributions?
  • What other benefits are you paying for?
  • What are the other deductions?

Spend less than you earn

  • What does this mean?
  • Why must you spend less than you earn?
  • How do you avoid debt?
  • Why is budgeting important?

Time value of money

  • What is time value of money?
  • What is inflation and what does it do?
  • What is the effect of interest?
  • Why is time important?
  • How do you calculate future value?

Effect of compounding

  • What is compounding?
  • How does it work?
  • Why must you start young?

The real cost of debt

  • What is debt and what types of debt are?
  • What is the real cost of debt?
  • How do payments work?
  • How should you manage debt?

Pay yourself first

  • What does pay yourself first mean?
  • Why must you do this and how will it help you?
  • How can you pay yourself first?

Risk versus return

  • What does risk vs return mean?
  • Why is it important?
  • What are the different investment options?
  • Which options are safer?
  • Which option have bigger returns?

If you don’t know the answers to all of these questions then you can improve your basic financial literacy.

In my next few blog posts I will expand on each of these principles to answer the questions

How do you learn financial literacy

Financial literacy is not formally taught and most people learn from experience. If you grow up with parents who can teach this to you or you have a mentor then you are lucky. Most of us figure this out by trial and error.

Unfortunately our society places more emphasis on consumption and spending than on saving and investing. We are brought up to think that we need to earn money to spend money to buy the nice things if we want to have a happy life.

If only we could change that focus to one of understanding how to become self sufficient and financially stable. When we become financially independent and understand how to grow and manage our money our lives become easier

Luckily there are many ways to learn and teach yourself. Here are some of those ways

Follow me on twitter ….

Read books ….

Read online blogs …

Use Financial Management Tools. …

Listen to Money Podcasts. …

Do your own financial plan and understand it …

Break Your Consumer Mentality.

Subscribe above for my next post on the financial literacy principles explained.

How have you learned financial literacy, what have been the most important principles for you?