By Jessica Wee
Does the idea of making a financial decision or checking your bank account stress you out? You’re not alone as most people suffer some form of anxiety every time they need to talk about money – let alone, manage it.
Every year in April since 2004, Americans have been celebrating Financial Literacy month. Take this as your opportunity to review your finances and gradually improve them.
Financial literacy is all about having the capability and confidence to make major financial decisions like opening the most suitable bank account, plan for retirement and paying off personal debts.
Before you can start spending, saving and investing, you need to understand your inflow of cash.
There are 6 fundamental pillars in achieving financial literacy:
Take a look at your salary slip to identify what is your gross and net income. For most of us, there is an income tax deduction, defined benefits (Employees Provident Fund) deduction, employee’s insurance, etc.
Do you also have other income i.e. rental, dividend, side business? Tabulate your monthly income accordingly.
Once you have determined your monthly net income, you’re ready to spend it responsibly within your personal budget.
To create a monthly personal budget, You need to track your spending over the course of two months and then break down the expenses into categories. Try the 50:30:20 budgeting rule for those of us who want to get into the details of our spending habits.
We have been told the importance of saving money from childhood. However, it is hard to spend less than you earn without specific financial goals to work towards.
Therefore, your financial goals should include:
(I) Saving for emergency fund – 6 months worth of basic living expenses
(II) Saving for retirement – start putting aside 10% of your net income each month. Compounding interest will work to your benefit, so start as early as you can.
(III) Saving for big purchase – whether it is a home, car, vacation – the sooner you start saving, the less you need to put aside each month
(IV) Paying off personal debts – be it credit card/ student loan – ensure you meet monthly repayments promptly. Use your cash balance each month to pay off the highest interest rate loans, this is usually the credit card.
Investing involves increasing the number of sources and your income. This is the most challenging pillar because people fear losing their money or end up investing in products they do not understand for the sake of exceptional returns.
Invest only in what you can explain to a child in a sentence/paragraph for them to understand. Their understanding will reflect yours.
Good investment strategies will involve the understanding of asset allocation, dollar cost averaging, how compound interest works and risk assessments.
As a diligent saver, you may borrow at some point for major purchases like for an education, a car or house.
Borrowing money is not a bad thing as long as you know how to compare loans and maintain a healthy credit score. Learn how credit scores work. In general, the higher your credit score, the less interest you’ll be charged.
Keeping a balance on your credit card is the easiest way to rack up debt, but choosing the right credit card and using it responsibly can help you increase your credit scores.
Once you have set yourself a dependable budget and investment strategy, it is important to protect the money you have made. This includes:
(I) regularly reviewing bank and credit card statements for mistakes or suspicious activities
(II) keeping documents and passwords secure to prevent scams or ID theft
(III) buying the right kind of insurance to protect yourself and loved ones in the event of untoward incidents.
(IV) stay alert on any social media, snake oil or love scam
To take advantage of financial literacy month, start small by
- Connecting financial education to the discipline and teaching of your child
- Making financial literacy the topic of your book club
- Asking and researching one financial question a day
Happy financial literacy month!