Ask the Experts - Financial Literacy Week
most a few days) securities. These include having a savings account with your bank. In the end, saving money comes down to simple math. It really is as fundamental as 2+2=4 Investing
Investing money is the process of using your money, or capital, to buy an asset that you think has a good probability of generating a safe rate of return over the period of time you hold the asset. This asset tends to make you wealthier even if it means suffering volatility, perhaps even for years. Such Assets include but are not limited to bonds, stocks or real estate. Investments uses a concept known as compounding. Compounding is the process of generating more return on an asset's reinvested earnings. I.e. interest earning more interest. To work, compounding requires two things: the reinvestment of earnings ( interest) and time. Compound interest can help your initial investment grow exponentially. For younger investors, it is the greatest investing tool possible, and the #1 argument for starting to invest as early as possible.
How Much Should I Save Versus How Much Should I Invest?
Saving money should almost always come before investing money. Think of it as the foundation upon which your financial house is built. The reason is simple. Unless you inherit a large amount of wealth, it is your savings that will provide you with the capital to feed your investments.
As a general rule, your savings should be sufficient to cover all of your personal expenses, including your loan repayments, insurance costs, utility bills, food, and clothing expenses for at least six months. That way, if you lose your job, you’ll be able to have sufficient time to adjust your life without the extreme pressure that comes from living pay to pay.
Any specific purpose in your life ( goals such as retirement, education, purchasing land/house, purchasing a car etc.) that will require a significant amount of cash in more than 6 months should be investment-driven. A general rule is that you should invest approximately 15%-20% of your income. Once you have these in place, I suggest you look at health and life insurance. This is really vital in any financial plan you work on.
Insurance
Insurance is a risk transfer mechanism. It restores the holder or beneficiary to the place they were before their loss (financially). In other words, the goal of insurance is to make you financially whole following a mishap.
Having sufficient cover protects you against risks that we can't afford to and should not have to take care of out of pocket (from our savings and investments). Basic insurance literacy starts with reading your vehicle, health, home and life insurance policies. A number of people get policies, throw them in a drawer and never look at it until it is time for a claim. The result is you may not have the coverage you ought to have. Always read your policy. If you don't understand it, call your agent, broker or insurance company.
Your financial status ought to be evaluated on an ongoing basis. As your circumstances change, so will your needs. Over time, the amount of possessions you own may increase, requiring more insurance. The arrival of a child may lead to needing an investment account opened for their education, increasing your retirement bucket and buying additional life insurance. There are various options out there that require you to shop around. We cannot continue to accept what we are giving without comparing options out there. I recently heard of an insurance cover that lowers your premium because you are female and are expected to not experiment as much as our men do. That is definitely something worth exploring. The key is to get as much information as possible from those specialized to do so.
Your level of financial literacy affects your quality of life significantly. It affects your ability to provide for yourself and family, your attitude to money and investment. The good news is, greater financial literacy has been shown to reduce stress, thereby improving mental and physical health, and increasing ones’ overall productivity.
Financial literacy will enable you to understand what is needed to achieve a lifestyle that is financially balanced, sustainable, ethical and responsible.