The term ‘finance’ basically means management of money. Finance has been broadly classified into three categories, which are personal finance, public finance and corporate finance.
Firstly, personal finance is solely related to a particular individual and it includes activities such as purchase of insurance. Secondly, public finance refers to aspects like taxing, expenditure, etc for the welfare of citizens. Lastly, corporate finance is a category that involves the role of stocks, bonds, investment, financing a business, etc.
Now, financial literacy, put in simple terms, means to educate oneself with the ways and strategies to manage one’s own money and to effectively use those skills for a monetarily sustainable future. Obtaining such knowledge is a never-ending journey for one, in order to effectively manage the assets.
Like any other novel concept, learning about finances also lets us be aware of the pros and cons of doing certain things with the money you hold. It definitely involves detailing of short- term and long- term impacts of any choice that has been made.
How can financial literacy be helpful?
In today’s scenario, given the predominance of financial products, it is more important to gain financial literacy. Financial literacy is indicative of a thorough knowledge of financial attributes such as budgeting, borrowing, investing, management of personal finances and taxation, specifically.
However, it necessarily sheds light on major aspects such as savings, quicker redemption of debts, risk management, setting particular financial goals for oneself and many more. Knowledge of such aspects is indispensable for efficient management of assets and clearance of debts.
Financial literacy certainly helps an individual to adapt a lifestyle inclusive of regular monitoring of one’s assets, constant investment, etc., thus making the person more financially capable and independent.
On the other hand, with the rapidly evolving society, it’s always in the best interest to be updated about any aspect. So, being financially smart helps you in escaping from serious money-related frauds.
How does one become financially literate?
One can be considered financially literate in the most uncomplicated way by just mastering four major aspects. They are as follows:
Budgeting primarily focuses on spending, saving, expenditure and investment. There has to be a strict balance among all these areas. Nevertheless, one’s primary concern must be to clear off debts, if any and distribute the assets accordingly in the above mentioned categories.
At a point in life, many of us borrow money. There is a particular criteria to keep in mind to do this , i.e., keep a check on existing interest rates, the period for which you have borrowed and others. Understanding such things will definitely boost one’s financial literacy levels.
Investing is as important as saving for every individual. Investment is one such purchase that is used in future for the sole purpose of wealth generation. Anyhow, prior to the investment it is advisable to learn about the existing market prices, risk levels, required indexes, etc.
4. Management of personal finances
Being aware of all the above-mentioned aspects aids an individual in their financial literacy and this ultimately leads to effective management of personal finances. For a person, from resolving debt to taking major decisions in investment, all these can be well- done with thorough knowledge of the above.
Financial literacy is a fundamental skill to be acquired by everyone as it definitely guides people towards a stress- free financial sustenance and helps in prior planning of asset allocation.