Financial literacy is crucial for making informed financial decisions that can significantly improve your financial well-being. By understanding the core principles of financial literacy, you can take control of your financial future, avoid common pitfalls, and work towards achieving your financial goals.
In this article, we’ll explore the five main principles that form the foundation of financial literacy.
1. Budgeting
Budgeting involves creating a plan for how you will spend your money each month. By tracking your income and expenses, you can ensure that you live within your means and avoid overspending. Here’s why budgeting is important:
- Track and manage expenses: A budget helps you see where your money goes, making it easier to identify areas where you can cut back.
- Set financial goals: Whether you want to save for a holiday, buy a home, or build an emergency fund, budgeting helps you allocate funds towards your goals.
- Avoid debt: By sticking to a budget, you can avoid relying on credit cards or loans to cover your expenses.
Start by listing your monthly income and fixed expenses like rent, utilities, and groceries. Then, allocate funds for discretionary spending and savings. Free budgeting apps like Monzo and Revolut can help make the process easier.
It’s important to note, built-in budgeting tools within mobile banking apps typically require you to open a current account with them to help you manage your money by tracking your spending.
For tips and advice, see How to Stop Overspending.
2. Earning, saving and investing
Understanding how to earn, save, and invest your money is necessary for long-term financial growth.
Earning: Look for ways to increase your income, whether through promotions, side jobs, or improving your skills to enhance employability.
Saving: Aim to save at least three to six months’ worth of expenses to cover unexpected events like job loss or medical emergencies. Make saving a habit by setting aside a portion of your income each month. Even small amounts can add up over time.
Investing: Investing allows your money to grow over time through compounding. You might want to consider stocks and bonds. However, if you’re new to investing, seek advice from financial advisors or do your research to understand the risks and rewards.
3. Debt management
Debt management is about understanding and controlling our debt to avoid financial pitfalls.
Good debt: This includes loans that can improve your financial situation over time, like mortgages or student loans.
Bad debt: This refers to high-interest debt that doesn’t provide long-term benefits, like credit card debt.
Always try to pay more than the minimum payment on your debts to reduce interest and pay off the debt faster. If you have multiple high-interest debts, consider consolidating them into a single lower-interest loan or a 0% balance transfer if possible.
If you’re struggling with debt, consider seeking professional advice or exploring options like an Individual Voluntary Arrangement (IVA).
4. Risk management and insurance
Risk management involves protecting yourself against unexpected financial losses. Insurance is a key tool in this process.
Types of insurance can include health, home, car, and life insurance which can all help you avoid financial losses due to unforeseen events. Knowing that you’re protected can reduce stress and provide peace of mind.
5. Ongoing financial education
The financial landscape is always changing, so it’s essential to continue educating yourself about financial matters.
Stay informed and keep up with changes in financial products – better knowledge leads to better financial decisions. As your life changes, so do your financial needs. Ongoing education helps you adapt.
If interested, there are plenty of free online courses at The Open University which can help you stay informed. Some of which include:
- Managing My Investments
- MSE’s Academy of Money
- Understanding and Managing Risk
What is Financial Literacy Month?
Financial Literacy Month is an annual event in April dedicated to promoting financial education and empowerment. During this month, various organisations offer resources, workshops, and seminars to help people improve their knowledge.
Although we’ve missed it for 2024, it’s an opportunity to focus on financial literacy and improve your skills. Learn more about Financial Literacy and Why It’s Important.
If you’re struggling with debt, consider reaching out to MoneyHelper for free debt advice. You can also speak with an expert advisor about debt management solutions, including IVAs, by contacting the friendly MoneyPlus team.
