Empowering Yourself Through 18 Essential Pillars of Financial Literacy
It’s 2023. You can learn everything online for free if you have a stable internet connection.
This is exactly what everybody says, right? But they don’t know when something is free, you have to pay with your time.
Yes, it’s free! But is it well-structured? Do you know exactly where to start? Which route to follow? The exact steps you need to take? No.
To figure that out, you need to invest your time. Spend days and months researching. Only then you will be able to carve a path through this scattered river of knowledge.
When you start learning about finance without any courses, everything becomes confusing. You don’t know how or where to begin. It all seems so complicated that you decide to give up.
If that’s the case, don’t worry. Because I am here to introduce the 18 essential pillars of financial literacy. This article will give you an idea of what this fuss is all about. It’s just a glimpse into the world of finance.
18 Essential Pillars of Financial Literacy
Budgeting
So, budgeting, huh? Seems easy. It technically is if you have strong willpower. Creating a budget seems trouble-free, but sticking to that budget till the end of the month? Now, that requires some self-control.
To be efficient at money management, all you need to do is access your financial situation. Evaluate your current financial standing and identify your money goals accordingly. Track your expenses for a few months to clearly understand where your money is going. If your spending habits are not supporting your goals, make cuts wherever needed.
Now create a budget.
Once you go through all this effort to understand how you work with money, self-control comes automatically.
Saving
Budgeting is done so that you can save money without compromising on your needs. To be good at savings, pay yourself first. Whenever your salary is credited, allocate a portion directly to your savings without spending on anything else.
How would you know how much to save? Well, that depends on the budget you created. Automate this process to make sure you are consistent with your savings.
Another thing to do is create an emergency fund and maximize your retirement contributions. Remember, achieving financial independence through saving requires consistency, dedication, and a clear plan. It’s a journey that might take time, but with determination and efficient financial management, you can work towards achieving your financial dreams.
Investing
Investing involves working with various assets to generate returns and build your wealth over time. Once you educate yourself about investing, it becomes a powerful tool to gain financial independence.
Understand how much risk you are willing to take and diversify your portfolio accordingly. Spread your investments on stocks, bonds, real estate, and cash. Time is a significant factor in investing due to the power of compounding. Start as early as you can and invest for the long term.
Use a consistent investment strategy instead of predicting market movements. That can be quite risky.
Debt management
First and foremost, compile a list of all your debts and note down the interest rates, minimum payments, and total balances for each debt. Then create a debt repayment plan. Create an extra income to accelerate your debt repayment and negotiate with creditors for lower interest rates if possible.
Avoid taking on new debts, and explore options for consolidating multiple debts into a single loan. Also, create an emergency fund while repaying debts for financial safety.
Taxes
Familiarize yourself with the tax laws in your country. Maintain organized records of your income, expenses, investments, and other financial transactions to make tax filing more efficient.
Strategize your retirement contributions and use tax-advantaged accounts, such as retirement accounts and health savings accounts (HSA). Claim all your eligible tax credits to reduce tax liability. It will lead to higher tax refunds or lower tax bills.
Also, stay informed about the ever-changing tax rules. You never know which piece of information can be leveraged to your benefit. Whatever it is that you do to save your money, make sure it’s legal and avoid tax invasion at all costs.
Banking and Financial Products
It’s probably one of the most important factors in achieving financial independence. All the other 17 pillars of financial literacy are nothing without this one.
Budgeting, savings, and investments cannot be done without basic knowledge of how banks work. You need to familiarize yourself with all the financial services banks provide.
What are bank accounts, how do credit cards work, and what are the benefits of loans and credit products? Stay informed about investment accounts, retirement accounts, online banking, and money market accounts.
Retirement Planning
When we are young, dumb, and broke trying hard to excel in our careers, we often forget about retirement. It feels far, like a never happening event. But eventually, it does happen. And if you were prepared for it, everything feels good, comforting, and peaceful.
But god forbid if you were careless, a lot can go wrong.
That is why it is important to educate yourself about everything, including retirement savings plans to retirement taxes. Be aware and take advantage of employer benefits. Don’t forget that healthcare expenses tend to increase in retirement. Research healthcare options, including Medicare, and plan for these costs accordingly.
Insurance
Having insurance prevents you from all those expenses that could significantly put you in a financial rut. Have a major health issue? Got into an accident? Your car got damaged? You don’t need to worry financially as long as you have insurance.
Health, life, disability, auto (vehicle), property…? You can get insurance for everything!
Umbrella Insurance offers additional benefits beyond the limits of your home and auto insurance policies. It provides an extra layer of protection in case you face a substantial lawsuit.
Credit Score and Credit Reports
Credit scores and credit reports are proof of your creditworthiness. They open doors to better loan terms, lower interest rates, and higher credit limits, making it easier to finance important purchases and investments.
It can lead to better financial opportunities and help you avoid paying deposits or provide more favorable payment terms. It’s crucial to monitor your credit reports regularly and maintain a healthy credit score. By doing so, you can unlock numerous financial opportunities and set yourself on a path toward greater financial freedom and independence.
Estate Planning
Estate Planning plays a crucial role in safeguarding your wealth, providing for your loved ones, and ensuring your financial goals are met. It protects your assets from potential creditors, lawsuits, and other financial risks.
With a well-crafted estate plan, you have control over how your assets will be distributed after your passing. This ensures that your wealth is distributed according to your wishes and in a manner that aligns with your financial goals and values.
Understanding Investments and Risks
When you understand investments and risks, you can make informed financial decisions. You’ll have the knowledge and confidence to assess different investment opportunities, weigh potential risks, and choose strategies that align with your goals.
While all investments carry some level of risk, understanding risks helps you manage them effectively. Diversification, asset allocation, and risk assessment can minimize the impact of potential downturns in specific investments.
Financial Goal Setting
Setting financial goals provides clarity about what you want to achieve. It helps you identify your priorities and stay focused on actions that align with your long-term objectives.
To create effective goals, clearly articulate what financial independence means to you. Is it retiring comfortably, having a certain level of passive income, or achieving a specific net worth? Having a clear vision will guide your goal-setting process.
Financial Statements
Making informed financial decisions is crucial for achieving financial independence. Financial statements serve as a basis for evaluating different choices, such as investments, major purchases, or debt management strategies.
The balance sheet in financial statements calculates your net worth, which is the difference between your assets and liabilities. Monitoring your net worth over time helps measure your overall financial progress and wealth accumulation.
Economic Concepts
You should be aware of economic concepts such as inflation, interest rates, compound interest, opportunity cost, supply and demand, diversification, GDP, market cycles, and other global economic factors.
By understanding these economic concepts and their implications, you can make more informed financial decisions, set realistic goals, and adapt your strategies to economic conditions. Building economic literacy is an empowering step toward achieving financial independence.
Consumer Awareness
Consumer awareness helps you avoid falling into debt traps and make responsible borrowing decisions. Awareness of consumer rights safeguards you from falling victim to scams, fraud, or unfair practices. Know your rights when making purchases or dealing with financial institutions.
Being an informed consumer means making wise choices while shopping and avoiding impulsive purchases. Evaluate needs versus wants, seek discounts and deals, and avoid overspending.
Behavioral Finance
Behavioral finance addresses how emotions like fear, greed, and overconfidence can lead to impulsive investment decisions. By understanding these biases, you can avoid making emotionally driven investment choices that may harm your financial goals.
It highlights how individuals often follow the crowd in investment decisions, leading to a herd mentality. Being aware of this bias can help you make independent and well-reasoned choices rather than blindly following the masses.
Sustainable Finance
Sustainable finance takes into account various ESG risks, such as climate change, resource scarcity, and social issues. By considering these risks, individuals can make more resilient investment choices and protect their assets from potential negative impacts.
Embracing sustainable finance allows individuals to align their financial goals with their personal values. It provides an opportunity to invest in causes that matter to you, enhancing the sense of purpose and fulfillment on the path to financial independence.
Entrepreneurship and Business Finance
Understanding entrepreneurship and business finance can be a powerful driver of financial independence. These skills empower you to create opportunities, build wealth, manage risks, and make informed financial decisions that align with your long-term goals.
By applying the principles of entrepreneurship and business finance to your personal finances, you can work towards achieving lasting financial independence and a secure financial future.
