Improving your financial literacy is not something that will happen overnight, nor is it something you’ll accomplish by reading a single article like this, but it is a goal that’s well worth the effort it takes. If you think knowing how much money you have in your bank account at any one time makes you financially literate then you need to think again. Financial literacy covers the whole gamut of money issues, from the cost of credit and the right times to borrow, to the importance of budgeting, saving and investing.
The good news is, if you think your financial decisions are holding you back, it’s never too late to improve your financial literacy. There are a huge amount of online resources you can access for free (here are a few to start you off courtesy of the personal loans provider Wonga.co.za), but there are also plenty of other steps you can take. So, if you’re ready to improve your financial literacy, here’s our quick guide to help.
Step 1 – Understand the basics
The first step to becoming more financially literate is to familiarise yourself with some of the common terms and understand the basic principles of sound financial management. For example, one very simple principle of sound financial management is not to spend more than you earn. To do this, you need to understand the importance of budgeting and be able to calculate your income and expenditure. You can then start to think about where cutbacks can be made and start to save for the future.
Step 2 – Get to grips with your household finances
Calculating how much money you have coming in is easy. It’s more difficult to know how much goes out and where it goes. If you want to have more control over your household finances, you need to know exactly how much you’re spending. To do this, you need to:
- Review your bank statements
- Go through your monthly bills
- Scrutinise your credit card statements
- Take a look at any loans
- Review any savings and investment accounts
- Obtain a copy of your credit report
Once you’ve done all that, you should have a good idea of exactly where your money is going, where money can be saved and what changes you need to make. For example, if you are paying high levels of interest on a loan every month, your first priority should be to repay that loan before you focus on other goals.
Step 3 – Set your long-term goals
It’s much easier to keep track of your finances if you set an achievable financial goal. This could be a broad aim, such as saving £100 every month, or something more specific, like clearing your overdraft, paying off a credit card or saving enough to pay for a holiday upfront without having to go into debt.
Step 4 – Make a budget and stick to it
Once you know how much money you have coming in and going out every month and have a financial goal in place, you can then draw up a budget that will help you achieve it. This should be a budget that you can stick to. It should include all your expenses, from the essentials like utility bills to the nonessentials like eating out. You should work through each cost and think about how it can be reduced, i.e. can you switch to a cheaper tariff or take lunch with you when you go to work?
You should then revise your budget when changes are made. If you reduce your monthly bills then record that in your budget. If your income increases, then record that too. This will help you determine exactly how much disposable income you have at the end of every month.
Step 5 – Understand the difference between good and bad debt
In today’s world of instant gratification, when people want things they tend to want them now. Rather than saving, people will simple use their credit card or enter into their overdraft and worry about making the payments later. Understanding when you should and shouldn’t use debt is an incredibly important step in achieving long-term financial health.
Very simply, good debt is a debt which helps you build wealth. A common example is a mortgage. Bad debt is a debt which eats into your wealth and ultimately ends up costing you more. Car loans and expensive credit card bills for nonessential items are both examples of bad debt. Here you can read more about good and bad debt.
What are the hardest financial lessons you’ve learned? And what were the most important? Please share your experiences with our readers in the comments below.