Personal financial literacy is the only knowledge that entails everyone to learn
Unfortunately I did not learn anything about financial literacy for beginners at schools
Also I was not lucky as my parents did not teach me basic financial literacy
I had to join the workforce and learn my financial knowledge all by myself
On my financial journey, I stumbled upon one financial advisor and writer I really like
He shaped my mentality on how to think about financial matters in one of his books
His name is Dave Ramsey and his greatest book is called Total Money Makeover
I have seen so many people I personally know commit nonsense financial mistakes
That’s why I decided to write this post
I will do my best to teach you the basics of financial literacy
What is personal financial literacy?
Financial literacy is the knowledge about financial concepts that empowers you to make good financial decisions to manage your money and your financial future
There are two paths, learning the personal financial literacy and implementing or doing them in your life
Do you need financial literacy?
Yes, everyone needs to be equipped with the basics financial knowledge
Everyone should learn everything about his personal financial literacy as one financial decision can cost you thousands of dollars and some debt to pay
I will give you an example, you go to a car dealership and buy a brand new car with no down payment and 3.5% APR – Annual Percentage Rate for 5 years
You think it is a great deal
Now you buy the car and after 2 years you lost your job and decide to sell you car
Surprise, you discover that your car is not worth its value for the remaining 3 years left in your debt
You sell it today and you pay its sale value to cover the payments
Currently you lost the car but you still have debt to pay
You should have learned that new car loses 15% of its value as long as you switch the engine and leave the dealership
Unfortunately some financial mistakes are very hard to recover
It takes time and energy to fix
Why financial literacy is important to you?
It is not only important but it is critical, if you have the financial knowledge you can avoid financial crisis
I will give you an example, you go to a car dealership and buy a brand new car with no down payment and 3.5% APR – Annual Percentage Rate for 5 years
You think it is a great deal, you buy the car and after 2 years you lost your job and decide to sell you car
Then you discover that your car is not worth its value for the remaining 3 years left in your debt
Today you sell it and you pay its sale value to cover the payments
Now you lost the car but you still have debt to pay
You should have learned that new car loses 15% of its value as long as you switch the engine and leave the dealership
Also you should have learned that buying a car is liability and not an asset
It loses its value every day
Financial terms to understand and learn about
The below list is a good collection of basic personal financial terms to overcome your literacy
It is not hard to learn all the basics like
Assets
Asset puts money in your pocket
Your income is an asset
If you have money in your bank saving account which generates an interest then this money is an asset
Liabilities
Liabilities are anything that take money out of your pocket
Also liabilities are financial obligation like a car loan where you have to pay
Some liabilities like a mortgage is a good liability as you accumulate wealth
Net worth
Net worth is the difference between all of your assets minus all of your liabilities
You can calculate your net worth at any given time by summing all the assets
Home estimate value = $600,000
Saving account = $15,000
Retirement saving account = $80,000
Car estimated value = $12,000
Jewelries and gold = $30,000
Total assets = $600,000 + $15,000 + $80,000 + $12,000 + $30,000
Then calculate your total liabilities as shown below
Mortgage remaining amount = $230,000
Credit card debt= $3,000
Line of credit and loans = $40,000
Net worth = $464,000
Earning an income
You go to work daily and you get paid
This is called active income
There is also what is called passive income or earn while you sleep expression
If you build an asset generating an interest for you like money in a saving account
This will generate income on a monthly basis while you sleep
Budgeting
Budgeting is a process you create like a plan to sort all of your incomes and all of your spending represented as expenses
Where budgeting itself is a process which you do when you build your budget
Saving money
Saving money is a continuous process you pursue by deducting from your income to build short term savings to buy car or home
Also build a long term savings like your kids education and your retirement plan
Interest
Interest is the percentage that any money can make if they are deposited in the right investment channel
It can be money you make if it is an asset or money you pay in case of liability
Principal
Principal is the amount of money you borrow without applying the interest to it
For example, if you borrow $5,000 with 5% interest annually then regardless of what you currently owe right now
Still the $5,000 is known as principal
Investing
Investing your money in one of the investment channels that can generate interest for you is one of the valid ways to build wealth
There are so many forms of investment – the more you collect money in the form of interest, the more it requires to be knowledgeable about this investment type
If you are skeptical then go for saving account or Guaranteed investment certificate (GIC) in Canada or Certificate of deposit (CD) in USA
Debt and types of debt
Debt is any amount of money you are obliged to pay to someone else
You can owe some money to a friend or family member and you can both agree to arrange how to pay it mutually
But that’s not I am referring to
I am talking about debt which you owe to a financial institution or a bank
There are two types of debts
Secured debt
When you get a loan to buy something like car or house
This debt is secured with the item you bought
If you don’t pay the loan, the financial institution can seize your item which you bought
This is called collateral
Unsecured debt
Any loan you take without any thing to secure in return
Credit cards are typical example of unsecured debt
Loan Term
Any loan which you apply form comes with term
Term dictates the interest rate as known as APR (Annual Percentage Rate) and a duration like how many months you have to fully pay this loan
Amortization
Amortization is used mainly in paying down a mortgage
This amortization is a predefined schedule by which a borrower will pay down a loan with its associated interest, taxes (usually properly tax) and fees
Credit score
In your day to day activities, there is a score that is called credit score
It is always associated with your financial activities which you carry
When you apply for a mortgage or get a new loan even a new credit card, credit check should occur on your profile
Having a good credit score will make any loan to be approved without any obstacles
Benefits of financial literacy
People spend their life pursuing college or academic degrees
Some of them earn good incomes but without a proper financial literacy they end up piling debts
Which can eat most of their income, in a situation that leaves you broke and helpless
At least there are four benefits of learning personal financial literacy like
Staying debt free
If you are aware of all the personal financial literacy
You definitely will not fall in the car dealership trap listed above
You cannot imagine how stressful to get a debt you have no control about
For example, if you co-sign a loan to help a family member or a friend
if he/she cannot pay, this debt becomes yours
Increasing your net worth
Taking care of your spending and using a family budget, paying all your debt is not enough
You should take your budget to the next level by investing your saved money and thus increasing your net worth
Less anxiety and stress
Knowing your financial rights and following the right path means less anxiety and stress
There is nothing better than the feeling of paying all of your debt
There are so many people who lose their sleep worried about what will happen tomorrow if they are not able to cover their loan payments
Good outstanding in terms of family budget
Having a good personal financial literacy means you believe in building a budget with your spouse
At the same time, building a budget with your good financial knowledge means building it the right way
Doing it the right way means having good outstanding budget
What to do after learning basic financial literacy?
You now know the basic terms in daily financial knowledge
What is next for you to do?
Read more especially simple financial books
I recommend you read Dave Ramsey’s book called Total Money Makeover
Attend financial classes
You can attend many personal financial literacy classes with affordable price like Udemy
Start your own budget
If you did not start your own budget then what you are waiting for
Without a household budget you will not be able to know where you spend your money
You have to find many ways to cut in your expenses and put it against your debt or save and invest it