Let’s know What are the 5 principles of financial literacy?
To be concise, Financial Education is the education and knowledge which makes you financially free. That’s why financial literacy is very important in our life. It includes savings, budgeting, financial planning, and investing or anything where money is involved. Generally this type of education we don’t get in schools. We will try to understand in this blog the concepts of financial education in a simplified manner.
CREATING A BUDGET
By creating a budget you will be able to control your spending, saving, and investing. If you want to improve your financial health then you must know where your money is going, so start analyzing your expenses after that set clear goals.
HOW TO CREATE A BUDGET
Budgeting starts with calculating how much income you have every month, minus how much expenses you have every month. It can easily be done with the help of an Excel sheet, in a budgeting app, or even on paper. It’s up to you. However you calculate your budget, clearly note the following.
Make a list of the income that you receive every month. It may be your salary, money earned from a side job, or any other kind of money that you receive in a month.
Make a list of expenses that occur in a month. It may be further divided into two categories.
(i) Fixed Expenses:
Any unavoidable expenses are termed as Fixed Expenses. The amount of fixed expenses generally doesn’t change and is considered essential. Rent/mortgage payments, utilities and loan payments, etc. are in this category.
(ii) Discretionary Expenses:
Any unnecessary or nonessential expenses are termed discretionary expenses. For example shopping, clothes, restaurant meals, travel, etc.
Now calculate the amount of money that you can save in a month. It may be in the form of cash, or cash deposited into a bank account.
Now you should have a clear picture of your income, expenses, and savings. Subtract your expenses from your total income to get the amount of money you have saved at the end of the month.
REMEMBER you must put some amount of money in your emergency fund for any kind of emergency.
After starting saving every month you have to use your saved money to generate more money. Initially, as the saved amount of money is not big, we cannot start a good business or invest in Real estate, etc. But there are many options where we can start investing our money. Here are some options for investing in ascending order of risk.
Cash: The safest, most easily understandable and simplest way is to deposit your cash in a bank account. Here you will get precise knowledge of the Interest that you will earn on your deposit. But the rate of interest in banks is very low, that’s why the possibility of earning is very low. There is one more option in this category i.e. Certificate of Deposits (CDs). Certificates of Deposits are less liquid and generally provide a higher interest rate than those in savings accounts.
Bonds: A loan made by an investor to a borrower is known as a bond. It is a debt instrument. A typical bond provides a fixed rate of interest. Companies, municipalities, states, and sovereign governments use bonds to finance projects and operations. Investors of bonds are debt holders, or creditors, of the issuer. Bond details generally include the terms for changeable or fixed interest payments made by the borrower and the end date when the principal of the loan is due to be paid to the bond owner.
Mutual Funds: In the case of mutual funds more than one investor pools their money together to invest in securities. Mutual Funds are managed by portfolio managers and therefore mutual funds are not necessarily passive. Portfolio managers allocate and distribute the collective investment into stocks, bonds, and other securities.
Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds but are traded like stocks. As they are traded like stocks their value can change significantly during a trading day.
Stocks: A share of ownership in a company can be bought in the form of stocks which is one type of security. Stocks are also known as equities. Investors buy stocks for Capital appreciation, Dividend payments.