Understanding basic financial concepts can greatly enhance both your personal and financial well-being, empowering you to make informed decisions about your money. This article provides an overview of financial literacy fundamentals, highlighting key concepts to help you achieve your goals.
Budgeting
A budget is a financial plan that helps you track your income and expenses. Creating a budget helps you understand your spending habits and spot areas where you can save.
To create a budget, start by listing your monthly income, including your salary, investments and any other sources of earnings. Next, categorise your expenses into fixed costs (such as rent or mortgage payments and utilities), and variable costs (such as groceries, eating out and other leisure activities).
Once you have the figures, subtract your expenses from your income to see how much disposable income you have left each month. This will also help you pinpoint where you can cut back on spending. There are also a variety of easy-to-use budgeting apps available online to help you manage your spending.
Investing
Investing involves using your money to purchase assets with the expectation of earning a return. Although investing carries risks, it can be a powerful tool for building wealth over time.
Common investment options include forex trading, stocks, bonds, mutual funds and exchange-traded funds (ETFs). When investing, it’s important to consider your risk tolerance and your short-term and long-term financial goals.
Saving
Saving is the cornerstone of financial security. It allows you to build up funds over time for things such as emergencies, saving for a major purchase or planning for retirement.
A good rule of thumb is to aim to save at least 10% of your income each month and keep it separate from your expendable income. To make saving easier, consider setting up an automated transfer from your current account to a savings account each month.
Building Credit
A good credit score is essential for your financial health, helping you to secure loans, credit cards, utility contracts and other everyday financial products.
To build a strong credit history, start by using credit responsibly. Pay your bills on time each month and avoid carrying high balances on your credit cards. You can also improve your credit score by checking your credit report regularly for errors and ensuring all of your personal details are up to date.
Borrowing and Repaying Debt
Borrowing can be a useful tool for financing big purchases or investments, but it’s important to borrow responsibly and avoid excessive debt. When taking on debt, be sure to consider the interest rate, repayment terms and any extra fees. If you’re struggling to manage your debt, consider creating a debt repayment plan and seeking professional help from a financial advisor if needed.