What Is Financial Literacy and How Can You Achieve It?

To live in abundance, having a decent income is not enough. You need to learn how to manage your money. Only a few people think about this, but knowledge of how to handle money properly is necessary and useful for everyone. These skills help, for example, to buy a house faster, own a good car, and not worry about having enough funds for a vacation. These skills and habits are generally referred to as financial literacy. Let’s delve into what this means and how you can achieve it.

Financial Literacy

In simple terms, financial literacy is a specific set of knowledge and skills necessary for every person. This set allows one to manage their finances (hence the term “financial”) wisely (hence the term “literacy”) to achieve real well-being. By becoming financially literate, you will learn to:

• Accurately track income and expenses.
• Maintain a balance between these figures (ideally earning more than you spend).
• Save money for emergencies and specific goals.
• Invest funds correctly to generate additional income.
• Use economic data to strengthen your financial position.
• Distinguish between genuine financial services and expert advice from scams.

The most important aspect of financial literacy is that it can be learned at any age. The sooner a person understands its importance, knows how to improve financial literacy, and masters it, the greater their material well-being will be. The size of your income is not the most crucial factor. Some people with above-average earnings regularly struggle to make ends meet. They know how to earn money but not how to spend it wisely. Conversely, many people with modest incomes achieve financial success through their ability to manage money effectively.

The Importance of Financial Literacy

The ability to manage money properly is fundamental to achieving life stability and well-being:

• Even mastering the basics of financial literacy will help you earn more. This increases your chances of acquiring what you like and becoming more self-sufficient over time.
• You will feel content in the present and have justified confidence in the future, as money is spent only on what is necessary and beneficial. The acquired experience and flexible thinking help you adapt to changing circumstances without losses.
• You will become more disciplined. This quality simplifies all aspects of life, not just financial.
• Your peers will have additional reasons to respect you, which enhances your self-esteem. People appreciate success achieved through honesty, knowledge, and discipline and strive for the same.

In summary, financial literacy gives a person more chances to be happier. They have goals, self-respect, a desire to help others, and replace fears of problems with action plans.

Assess Your Financial Literacy

Learning financial literacy should start with assessing your own level. Evaluating how effectively you manage your money and make purchases is not difficult. Simply analyze a few facts and answer these questions as honestly as possible:

• How many sources of income do you have? A financially literate person typically has more than one, but this does not mean working nonstop. You can organize passive income through renting out property, dividends from stocks, and interest from bank deposits and savings accounts.
• Do you keep a budget? Constantly tracking income and expenses is a crucial part of financial literacy. You can use special apps or online banking programs for this. The key is to diligently record transaction histories on accounts and cards or be able to generate a full report. This way, you can control your budget, avoid debt, and prevent running out of money.
• Do you plan major expenses correctly? By calculating available resources, you can achieve your goals faster.
• Do you have financial goals and know how to formulate them? Setting financial goals allows you to focus resources on what matters most.
• Do you know how to use discounts? Promotions and discounts can significantly reduce expenses. However, it’s important not to buy everything just because it’s on sale. Sensible spending limits are also crucial.
• Do you know how to invest money to earn a profit? A financially literate person doesn’t take unnecessary risks but invests in predictable instruments.
• Do you save money for unexpected situations? Ideally, your emergency fund should cover living expenses for 3-6 months.

If you answered positively to at least 3-4 questions, you likely understand the essence and importance of financial literacy and are on your way to mastering its principles.

What to Learn to Achieve Financial Literacy

Financial literacy is a comprehensive set of knowledge and skills. You don’t necessarily need to attend expensive courses; most of it can be learned independently.

Budgeting and Saving

Start with analyzing income and expenses. This process involves several steps, but none are complicated:

• Analyze all your income sources to know how much money you receive and if there are new income opportunities.
• Calculate essential payments: utilities, groceries, loan payments, mobile phone and internet, transportation, regular medical visits, and medications.
• Review other expenses to see if you can eliminate or reduce some of them.
• Assess your use of credit cards to determine if it is efficient.
• Evaluate your investments to see if they can yield more profit.

The result should be a clear plan to reduce expenses and, if possible, increase income.

Setting the Right Goals

You can learn independently or attend financial literacy courses. The first thing to master is the methodology for setting and achieving financial goals. These goals can include:

• Buying property or a new car.
• Building capital to generate sufficient passive income in the future.
• Going on vacation or a long trip to several countries.
• Paying for education, for yourself or your child.
• Funding cosmetic procedures or surgery, etc.

Some goals require substantial capital, while others are less extensive and can be achieved more quickly. Understand that you can’t achieve everything at once; prioritize your goals.

Priorities depend on age and life circumstances. A new student doesn’t need to think about buying a house, whereas someone building a career might prioritize additional education or a car for commuting. Parents of a schoolchild might need to save for their university education.

All goals require different investments, but there’s a common methodology for working with them called SMART. This approach helps you determine if your goal is well-chosen and achievable. The characteristics of a goal in this methodology include:

• Specific. The goal should be as concrete as possible. Clearly state what you need. For example, if you want to live in your own home, specify the number of bedrooms, presence of a relaxation area, the neighborhood, etc.
• Measurable. The goal should include both the description and the desired price. For instance, if you want to buy a house, specify the amount you are willing to spend, like $300,000. Research the market to find out if houses meeting your criteria are available within your budget.
• Achievable. Assess if you can realistically reach the goal. For example, if you have $200,000 in savings and the bank is willing to offer a mortgage based on this, your goal is achievable.
• Relevant. Consider the importance of pursuing this goal right now. Maybe renting a house in the desired area is more advantageous than buying it.
• Time Bound. Calculate the timeframe in which you need to achieve the goal. For example, if the bank offers the best mortgage conditions for applications submitted within the next six months, should you take advantage of it?

If all the criteria are met, your goal is well-chosen. You just need to fine-tune your plan and start taking action.

If you learn to work with goals this way, you will already have a reason to be proud. You will likely be more financially literate than 90% of beginners, and financial literacy for beginners may no longer be necessary for you. But don’t stop there; continue to improve.

Financial Planning

Adjust your budget to allocate more resources towards priority goals.

• Calculate your monthly income, including all actual sources. It’s easier to track income if the money is deposited into your account or card.
• Draft your expenses, removing all non-essential spending.
• Include a category for unforeseen expenses in your budget.
• Strictly follow the income and expense plan you’ve created.

This budget is flexible enough to cover unexpected needs without issue. If no additional expenses arise, the extra funds can be saved.

Investing Basics

One of the key principles of financial literacy is that money can work and generate profit. Therefore:

• Save instead of spending. If you have an amount beyond your planned budget, transfer it from your debit card to a savings account. While the money is in the bank, it earns interest, and you can withdraw it if necessary.
• Don’t let inflation erode your savings. Once you’ve built an emergency fund, you can start earning from your savings. Proven methods include a bank deposit without partial withdrawal and replenishment options or one with both. In the first case, there’s no temptation to spend the money on trivialities. In the second, you can regularly increase the amount that earns interest.
• Invest in reliable and profitable assets. A common way for an average person to invest is to buy property to rent out or sell at a higher price. However, this requires significant sums. Consider stock market assets as well; many are just as reliable and can yield substantially higher returns.

There are other smart money habits that can be beneficial. For example, avoid over-saving. Financial literacy doesn’t mean forgoing all pleasures. Treat yourself to restaurant meals, cafe visits, and taxi rides. Pay for them with a debit card and regularly collect cashback.

Another option is to immediately set aside 10–15% of your income. This helps resist the temptation to spend extra money.

Overall, financial education tips are virtually endless. However, they can be boiled down to a few key principles:

• Analyze and plan income and expenses.
• Set achievable financial goals.
• Make your money work and generate profit.

If you can implement these principles, then your financial literacy is in good shape. But remember, this is an ongoing effort.