How to become financially literate in 7- steps
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Roshan Amiri
- . March 2, 2023
- . Update: March 3, 2023 3:49 pm
“Money moves the world” is something we have all heard at some point in our lives. Yet, so many people are always searching for money both during and after their work lives. What can they do to become financially independent?
A person’s financial literacy can be defined as their ability to make informed money decisions. These are the decisions that will lead them to financial freedom.
Unawareness of money matters can have a devastating effect on their financial lives, similar to a lack of education.
To become and remain financially literate, follow these 7- steps.
1.The acceptance of the offer
The first step in achieving financial literacy is to accept that one needs to acquire knowledge on this front. Many of us live in denial and do not understand the need to learn about managing our hard-earned money. Acceptance will allow one to explore and learn about the nuances of money management.
2.The awareness of the situation
Analyzing and defining financial requirements and objectives would be the second step. Even though ignorance can be bliss at times, it can only lead to stress when it comes to personal finances. One must be aware of both the present and future “money” needs.
It is important to draw up a budget based on three categories. Firstly, there are essential expenses, such as food, education, housing, etc. Secondly, there is the provision of a backup fund, and thirdly, money for achieving long-term goals, such as obtaining a child’s higher education, marriage, and retirement.
Even though everyone may not be able to follow Warren Buffett’s advice, setting aside an amount that would meet long-term fund requirements must be managed with discipline and sincerity.
3.The ability to learn
In the third step, one needs to acquire knowledge of the products available for investment. Another important piece of information is the expected return and the risks associated with it. People can allocate their income and assets to various investment avenues based on their risk appetite and juncture in life.
4.The importance of discipline
There are many significant steps, but if ranked on importance, a disciplined approach may be the most significant. The two most important factors under this meaningful step are:
Financial investments would only yield benefits if the approach is long-term. One cannot try to get high returns in the short term. There are financial cycles, and one must be aware of them. The investment may not deliver the expected yield at times due to market conditions, but one must persevere to hold on during these times.
Investing discipline: This is where most people fail. The key is to stick to a plan without exception.
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5.Participation
One must stay involved. It is not enough to invest and then forget. Ongoing evaluation and corrective action are equally important. By conducting regular evaluations, we will gain a deeper understanding of the product and will be able to manage future investments better.
Exiting an investment is also as important as investing itself. And this can only happen if one is engaged continuously.
6.Make sure your advisors are trustworthy
Investing in tips from unreliable sources or from one who is not an expert can lead to the rapid erosion of your hard-earned money. All the effort you put into a methodical investment can come to naught if you follow the wrong advice.
While one will gain substantial knowledge, it may not be possible to keep up with day-to-day changes due to the time needed for work, family, and other matters.
7.Be responsible when borrowing
In the end, it is important to differentiate between good and bad debts. A debt that would help one grow wealth (such as a home loan) or one that would help one make more money (such as a business loan) is a ‘good’ debt. Those loans that do not address the above two factors are referred to as ‘bad’ loans.
When buying a car to commute to the office, debt can be a good thing, since it might save time and energy. However, if the loan is preventing the person from saving for her long-term goals, buying a high-end car for the same purpose may be a bad debt.
