Are you financially literate?
WITH the cost of living and interest rates rising, a growing number of people are struggling to manage their finances. Many are experiencing real financial stress. But even in the best of times, managing your finances is hard. Every day, you’re making complex financial decisions (some of which carry huge ramifications) and there are more financial products and services available than ever before. Navigating this minefield can be overwhelming and lead to financial anxiety. Here are signs you’ve got the basics covered;
1. YOU TRACK YOUR CASH flOW
By tracking your cash flow on a regular basis, you’re ensuring your expenses don’t exceed your income. In other words, you make sure you’re earning more than you spend. A good sign you’ve successfully managed your cash flow is that you have a surplus or a buffer. These left-over funds can be used to boost savings, pay off debt or meet other financial commitments.
2. You have a budget – and you FOLLOW IT
Setting and following a budget requires financial discipline, which is a key part of financial literacy. By following a budget, you’re putting a measure in place to live within your means and reduce the risk of overspending. With all the competing demands that come with managing money, your budget can be a tool to keep you on track. And developing this habit over time can empower you to make wise financial decisions.
3. YOU UNDERSTAND THE DIFFERENCE BETWEEN GOOD DEBT AND bad debt
Love it or hate it, debt forms part of our financial portfolios and sustains the financial institutions we interact with. Knowing how to make debt work for you is a skill and a sign of good financial knowledge. It is crucial to understand the difference between good debt and bad debt. Good debt is debt used to improve your long-term financial position or net worth, such as a home loan. Bad debt tends to be consumption-driven and doesn’t have lasting value. Examples include pay-day loans or retail accounts.
4. YOU HAVE YOUR MONEY IN VARIOUS PLACES
One of the key concepts of financially literacy is understanding the importance of diversification. By having your money spread across various places (such as a savings account, property, the share market, superannuation and so on), you’ve
reduced the concentration of risk. This helps protect your wealth in tough economic times.
5. YOU UNDERSTAND HOW fiNANCIAL ASSETS WORK, ALONG WITH THEIR PROS and cons
Financial assets refer to things like cash, shares and bonds. It’s important to understand how financial assets work and how they can either help or hurt your financial position. For instance, savings accounts are a safe financial instrument that earn interest on the amount accumulated within the account. But the fact they’re so safe also means that they won’t outperform inflation.
This type of knowledge is an imperative part of financial literacy. Boosting your financial literacy can feel tough at first. But tackling your finances head on, controlling spending, participating in financial markets, handling debt, being able to understand financial assets and working towards financial goals can help you feel in control of your financial situation.