6 Things to Use to Measure Your Financial Literacy
Financial literacy is a growing subject worldwide, and for a good reason. It is the panacea for poverty in previously sidelined communities. Gone are the days of waiting for reparations alone without the financial knowledge to grow your net worth and protect it for generations to come.
What is financial literacy?
Financial literacy is the one thing that saves you from living in poverty for the rest of your life. It is the ability to use financial management skills to take care of your finances and grow wealth. Financial literacy involves managing your debt, expenses, saving, and investing. It is the ability to allocate your money towards all expenses and investments efficiently. The efficient allocation ensures that you do not experience a debt burden, nor will you struggle to pay your monthly installments – in case you owe some loans. Financial literacy protects you from the effects of financial mistakes such as getting blacklisted by financial institutions or living from paycheck to paycheck.
Everybody needs financial literacy to build generational wealth. The people you work for or the prominent entrepreneurs you read about today started from the bottom. The difference is that they used financial literacy to leverage their resources and skills to build their businesses – which are now listed on stock markets. Below we look at the six things you can use to measure yourself for financial literacy.
What are the six things you must use to measure financial literacy?
1. You make passive income
Did you know? You can pay off your credit card using the money you earn from passive income. Imagine someone who runs a successful blog or sells eBooks online? They can make continuous passive income that complements their salary and make life easier for them. However, not many people fight to earn a passive income because not everyone is financially literate – but this is something we can all learn to have. Therefore, if you are not yet earning passive income, you might have missed a few things about pooling income from various sources – more so online, where you can leverage tons of things to earn passive income. Safe to say, people who make passive income understand financial literacy because it led them to create this new income stream.
2. You have insurance that covers your investments
Growing your net worth does not come without risks. Life is full of risks, even for someone who isn’t doing anything to build their wealth. You are in more danger if you are growing your net worth. The more it grows, the more you stand to lose. Financially literate people insure themselves and their assets to avoid losing their wealth to accidents such as fire and theft. They also have health insurance to avoid getting in debt in cases where they need expensive medical treatments. In the end, insurance is all about protecting your wealth. So, you cannot say you are positioning yourself to be a future millionaire without making plans to protect your wealth.
3. You keep an emergency fund that covers three months or more of your daily needs
An emergency fund protects you from getting into unplanned debt. Debt is hard to manage; therefore, you should avoid getting into it for consumption purposes. Instead, you would get into debt to buy an asset like a house or machinery to use in your business. It will eventually pay for itself. But, without an emergency fund, when you temporarily lose a job and your salary, you might borrow to buy daily supplies, which leaves you down in a hole because the money you borrowed is not bringing you any returns. So, financially literate people keep an emergency fund to protect them from consumer debt. They know that debt for consumption purposes is difficult to pay back, and if you get it from financial institutions that report to credit bureaus, you will crush your credit score. A bad credit score has many negative repercussions for you, for example, lack of access to new debt.
4. You invest in many products (diversification)
Diversification saves you from hostile economic forces that affect investments. It is all about the famous old saying that ‘you can’t put all your eggs in one basket.’ When a stone drops on that one basket, you lose everything. Therefore, financially literate people invest in various sectors. They start a business and invest some of their money in stocks, cryptocurrency, bonds, and NFTs. Also, they don’t do it randomly, but they follow a system they devise with a financial planner.
5. You invest in products and services that cost less
Financial literacy overpowers the need to spend money to please the crowds. It is a voice of reason that requires you to probe every transaction you are about to get in. As a result, financially literate people don’t just walk into a store or office and buy items or get into deals. They want to know what’s in it for them. They eventually get the same service as everyone but at much lower fees or costs. They use the money they save from such deals to invest somewhere.
6. You hire tax professionals to reduce your tax burden
Finally, because financially literate people are all about saving money and reinvesting it, they want to maximize their tax savings by hiring a tax pro. Many people who don’t hire tax pros like me do so because they think we are too expensive. But people that hire us know that the money they pay us to prepare their taxes is essentially derived from the money we save them. But only a financially literate person knows that hiring a tax pro saves them money regardless of the fees they pay us.
In conclusion, do not feel bad about yourself if you don’t understand financial literacy. This is the time for you to start learning it. If you want to start a business or have one but do not know how to leverage credit to build it, go to my Link Tree and get my Business Structure and Funding Guide. If you require business advice, accounting services, or tax planning services, go to the same Link Tree and click on the rightful link. I will assist you.
Frequently Asked Questions
- What is financial literacy, and why is it important?
Financial literacy is the ability to leverage financial management skills such as budgeting, investing, and borrowing. Financial literacy can help anyone build wealth by spending their money wisely, investing, and borrowing to build wealth.
- What are the three main components of financial literacy?
Three main components of financial literacy are investing and taxation, budgeting, and dealing with debt.
- What are the five principles of financial literacy?
Five principles of financial literacy are:
- When borrowing, know that not all money is created equal
- Always pay yourself first; don’t prioritize expenses. Savings must be first.
- Understand how your money is taxed
- Don’t just invest; plan and seek advise
- Finance your dreams with investments
- How do you become financial literate?
You can acquire financial literacy through learning. You can learn it from financial podcasts and radio shows such as The Money Zone with Folasade, the Accountability Accountant, and by subscribing to financial magazines. You can also choose a financial management course or degree in school.
