This article explains the five principles of financial literacy. Understanding this gives you the proper foundation to build wealth and take care of your family for generations to come. There are many principles of financial literacy, but we will only focus on the five as we believe that they cover many others.
What are the five principles of financial literacy?
1 Prioritize savings
In finance, there is a saying that says, “Always pay yourself first.” By paying yourself, you will avoid giving your money to someone else in the form of buying things as soon as your salary is in your bank.
The fact is that before buying anything, pay yourself in the form of savings. Instead of subtracting your monthly expenses from the salary before setting aside money to save, why not flip the equation and start by removing savings and later allocate the remaining funds to expenses?
What this explains is that strive not to prioritize expenses. Savings must be first. If you can do this, you are on your way to starting something meaningful because you eventually start growing your net worth while reducing expenditure.
2 Understand how your money is taxed
If not handled well, taxes can be your downfall. They may discourage you from building wealth because you will always see your efforts going to waste every year. Imagine paying the minimum 18% tax rate in South Africa and paying another 15% Valued Added Tax (VAT) or sales tax on all goods and services you buy. That’s 33% of your income already gone to the government. Besides this, your employer deducts other types of deductions from your salary.
Therefore, if you don’t understand this – and more importantly, how to ensure that you pay minimum taxes, you may suffer. Each country has legal tax loopholes you can use to reduce your tax bill. Billionaires such as Jeff Bezos and Elon Musk are known for not paying taxes at all during certain tax years. They hire tax professionals to help them with this.
Therefore, if you are to build your wealth, remember to enlist such services of tax professionals at some point and save hundreds of thousands on taxes over time.
3 When borrowing, know that not all money is created equal
This principle safeguards you from randomly borrowing. Currently, several low-income earners use every opportunity to get meaningless debt from financial institutions. They do this because they can. However, not everything you can access is meant to benefit you.
The devil is always in the details. Based on your profile, you may walk yourself into expensive debt, which you pay back over the years. It’s sadder when this debt was for a non-income generating expense.
The new rule to learn about debt is to do the following before approaching a bank:
- Ask yourself why you need this debt
- Know how much you require before going there
- Ask if what you want to buy with the money will pay installments for itself. Is it worth it?
- Ask yourself if you qualify for the amount of debt you intend to apply for to avoid missing installments and ruining your credit score
4 Don’t just invest, plan, seek advice, protect your wealth
Social media memes seem to be running the show when it comes to investing by the young blood. However, not everyone talking about investing is a pro. You don’t need trending memes to know where to invest your money.
Therefore, before investing, get advice from trained and registered investment advisors. It may cost some money, but if you do not have the money to pay them, follow their social media accounts and listen to them when they talk on TV or radio. Usually, their interviews are ripe with investment advice.
Finally, as soon as you make your first investment, protect it. You can do so by obtaining insurance (for physical assets like buildings) or continuing education on wealth management.
5 Finance your leisure with investments
If you dream of visiting all famous places around the world, fund that adventure with investments. You do not need to buy stocks all the time and wait to sell them when you want to travel. But you can set aside some savings each month and withdraw from that account during holidays. People that finance their leisure using wages typically don’t save or invest. Such people risk retiring broke, putting everyone who depends on them in danger of poverty.