What are the benefits of becoming financially literate?
Before learning about how to manage personal finances, let’s answer the question above. Although the answer seems pretty straightforward, the question is worth asking. Indeed, if some people study finance or accounting, isn’t that for us to hire them to budget our spendings and invest our profits? Let’s dive a little deeper into this question.
According to Investopedia, “Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.”
Importance of Financial Literacy
As we explored in a previous article, finance is a field which has helped humanity build wealth, comfort and safety over time. It is thanks to finance and the barter mentality that we have developed such levels of knowledge in various disciplines.
While finance may be regarded with more complex mechanisms and calculations, financial literacy is still the basis of our society. Money doesn’t have more value than the value we, as a society, are giving it. Learning how to manage, trade, generate, and save money is the key to build wealth for one’ self and family. Failing to do so may result in tragic life circumstances, such as high debt, impoverishment and increase in stress and anxiety.
In this article, we are covering the basis of personal financial management to help you, your children, parents, or any loved one acquire the basics of financial literacy. This knowledge will later be the vector for building wealth, comfort and peace of mind in one’s life.
Personal Financial Management
Now that we have stated the importance of financial literacy, let’s start learning the basics, meaning: personal financial management. What is personal financial management? Forthrightly, it is one’s ability to manage their own personal finances. This includes, but isn’t limited to, managing earnings, spendings, taxes, and investments.
This article drafts the basics of personal financial management. Therefore, we will not dive deep into the investments part. However, we will do our best to provide the basic knowledge for one to become financially literate.
Budgeting Personal Finances
According to the Oxford dictionary, budgeting is “provid[ing] (a sum of money) for a particular purpose from a budget”. Regarding personal financial management, this means allocating specific funds to a different personal purposes (ie. housing, groceries, leisure…).
The first step to start budgeting is to know:
- How much you earn
- How much you spend
To help you with budgeting your personal finances, we crafted an accessible balance sheet you can download for free. Click on the button below and drop your email to receive it directly in your mailbox.
In this balance sheet, you will be able to list out all your different sources of revenue, and total them up. Then, once you know how much you spend, you will be able to make the difference.
How much do you spend per month?
The answer to this question will obviously depend and vary from month to month. However, there are some recurring expenses you can already know you will have to provide for (ie. housing). Other expenses, such as groceries, will roughly be similar from one month to the other. The challenging part will be in managing extraordinary expenses. But let’s go step by step.
First, you will need a little booklet and a pen or the Note app of your phone (depending on which one you are most comfortable with). There, for a week, you will write down every expense you have. Write them all down: the $2 snack, the $3 water bottle, the $70 tank refill for your car, the small grocery shopping at $25 and the large one at $115. Everything.
Once you have a list with all your weekly expenses, you will write them down in the balance sheet categories. In the end, your balance sheet should look like this:
As you can see, we spent $49.7 on grocery shopping this week and $8 on snacks. For food only, we spent $57.6 this week. Meaning, we can roughly estimate a $50 – $70 weekly spending on food.
Please round up the numbers to $10 above the original spending for every category (you can be more precise, but when establishing a first budget, keeping a $10 margin is a good start).
In the end, you should have an estimate budget that looks like this.
Once this is done, you will start another week and repeat the process. Leaving your established budget aside, you will write down all your expenses for the second week. At the end of the second week, you will repeat the previous exercise and compare week 1 and week 2’s budgets.
If they correspond, you can estimate that the amount provided is what you spend during a week.
If the amounts differ too much, you might want to reiterate the experience for a third week to figure out the right amount for said-category.
Once your budget is set, you can go back to your balance sheet and add the fixed monthly costs. Then, you can multiply times 4 the weekly budgets (there are generally 4 weeks in a month). Now you should have your total monthly revenues and your total monthly spendings.
Tip: To be sure you are spending the right amount each month, you can cash out the budget for each category. That way, you’ll be sure not to exceed the amount you decided to spend.
Investing Personal Finances
We cannot write an article about financial literacy without mentioning investments. What are investments? According to the Oxford Dictionary, an investment is “the action or process of investing money for profit”. Generally, it takes the form of a passive income.
Investing is possible when revenues exceed spendings to the degree where it is possible to come up, with or without going through a savings process, with a certain amount of spare money.
There are different types of investments. Here are the main ones:
- Gold or other precious metal
- Real Estate
- Stock market
- Cryptocurrencies or DeFi protocols
- Business creation or investment
Each of these investments have their pros and cons. Whether one will decide to invest in one or more of them depends on three different factors:
- The type of investor the person is
- The amount of money the person can allocate to the investment
- The time the person can allocate to the investment
We’ll detail each of these aspects of each category in our next articles. You can also subscribe to our newsletter to stay tuned for the release of future content.
To go further
While investments may path your way to multiple sources of income, there is another, safer option, which is to save money. Saving money can seem irrelevant at times where inflation rates are so high. Yet, when well set up, saved money can be a reserve just in case you end up facing tough times. Furthermore, the more you save, the more money you have aside to invest in any of the previous fields we mentioned earlier. Consider opening up a savings account on finnt.com which is specifically designed to help families build wealth over time