Before you build dreams and have hopes of becoming rich, you must understand that financial literacy is much more important than starting a business, a side hustle, or even it is a risk if you win the lottery and not know what to do with the money, you will end up broke again.
In other words, you are poor because of your lack of financial literacy, and in order to be rich, you have to have financial literacy, so we gathered all the information you need here to get you started.
What is financial literacy?
In simple words, financial literacy is the ability to understand few things and be able to manage them effectively, we will explain them below:
Income:
Income is the money you earn, through a job mainly, freelance job, service you provide, etc.
In other meaning, it’s the money you get trading your hours for.
Passive Income:
Money that you get through rent, dividend, royalties, etc. or its money you don’t necessarily trade your daily hours four.
Portfolio Income:
its through capital gains, or interest you earn in savings accounts, or stock lending.
Financial Literacy
The way to wealth requires financial literacy, it is the way for you to build wealth and make money, which technically is not as important as maintaining and increasing this money.
Few years back, I made some decent amount as a commission, that was the beginning of my financial freedom journey, i purchased some gold with it, it was nearly 10 grams of gold, few days after, I went with a friend of mine to Gold Market in Dubai, and I just found myself buying more gold, and I had this conversation with him where he said that he paid the down payment of his house with gold, which was nearly $40K, and that took me a moment to process, like how many years has this guy been doing that for? And he explained it, he said “ i get paid, pay my rent, pay my dues, keep aside some cash, and with the rest I buy gold and pretend that I wasn’t paid this money.
You might get money, you might make so much money but the way to wealth requires more than that.
Roles Of Financial Literacy:
There are some roles to Financial literacy that you should always remember, unless you are not serious about wealth.
Role 1: DO Not Rely on 1 source of income:
This is the biggest issue with wealth, if you get paid millions a month from 1 source, and that source dries off, or you get laid off work, that money is gone, and gone with it your hopes of riches.
Always diversify your income streams, so if one dries up, or you get terminated, you still have some money flowing in to your account.
It is important that these sources on income do not require you to be there physically, and at least cover 50% of your minimum expenses, so you are able to survive if the biggest source of income dried up,.
Role 2: Avoid Lifestyle Inflation:
This is where many people fall in terrible ways, and this has 2 parts:
The first part is spending money on lifestyle before securing assets or a source of income to cover the basics and the investments.so you end up with tons of liabilities that you will have to sell to cover rent, food and bills.
The second part, believing people with lifestyle and blindly follow their courses, and again ending up spending money on failed experiments.
Role 3: Convert Extra income to extra assets.:
You may have heard of asset allocation, it means you sell assets, and buy more rewarding or beneficial assets.
this concept is similar, the only difference is that you are keeping the assets, you are just buying more assets with the dividend or the profit you make, so you have more assets that make you more money.
Let us say that you have a car that you rent out, and it makes you $1000 a month in profit, buying gold with this money can protect your money, but if you buy a camera that you can rent out, you will potentially make $1400 a month, which you then can buy another camera, or save the money in gold and buy another car when the opportunity is right.
Watch This video on how to Rewire your money habits
Expenses:
I want to expand this topic so much, but instead, I will be brief and to the point.
Expense are just like income, but instead if in, its money out.
There are also different types of expenses which I will expedite on below:
Fixed Expenses:
These are fixed amounts that you pay for certain duration, just like rent, car payment, bills, etc. normally there are few tips and tricks to reduce these expenses which we will talk about later.
Variable Expenses:
These are not fixed amounts, which means they vary monthly just like food, gas, entertainment, etc.
Also these are playable expenses which can be reduced and we will also include them in the discussion in expenses in financial literacy.
Expenses in Financial Literacy:
Just like income, expense also have roles:
Spend Less Than You Earn
Which is the main thing to consider, your fixed expenses must not exceed 50% of your income, and your variable expenses must not exceed 20% of your income which that was not the case you have to:
- Move to a cheaper apartment, or have a roommate.
- Save on bills or split with a roommate
- Get a cheaper car, or use public transport
When it comes to variable expenses you must:
- Plan your weekly meals so you save on groceries.
- Cancel unwanted to unnecessary subscriptions.
- Cut down on fancy spendings.
Wealth is built with the gap between Income and expenses
DEBT
If you are not fully focused, take a break and come back with full attention, this is the most important thing you will probably read today.
Debt is divided into 2 main debts (Good debt, and Bad Debt)
Bad Debt
Bad debt is when you buy liabilities with a debt, like clothes, fancy cars, pay for wedding or start a business.
This will destroy your budget and break your bank, because this is purely taking money out of your pocket on the long run, you will pay that off over years and interest will drain you, so would the monthly instalments.
Read Also: Debt Freedome advisor
Good Debt
Taking a bank loan or a credit card to purchase assets is considered good debt.
If you take a car loan with monthly payment of $1,000 and you give the car for rent for $1,200 a month, you not only covered your monthly payment, you made $200 in profit.
This settled ?
Lets take this to a bigger scale, wealthy people do not have cash, they have assets, their lifestyle is paid by debt, they go to the bank with prove of asset, and get a credit card or a loan with the assets as collateral, and their assets pay the bank back.
Read that again, when you own enough assets, the bank will not only be happy to lend you money, also will remove the limit of credit for you, they know that you can pay back, and take more and more money.
That simply means, buy more assets. Either in shares, real estate, gold, or any asset of value to the bank
Investment
Investments in most cases will make you money, either with dividend, income, or profit.
There are many types of investments that you can put your money in:
- Stocks, bonds and shares.
- Businesses (start one or invest in one)
- Real estate (flip, rental property, holiday homes)
- Assets (equipment, cars, gold, silver, etc.)
While investing, that means there is a risk you have to understand and take, literally any investment.
Lets suppose you want to buy shares in any company, that trade could have a risk or stock fall, market collapse, and many other reasons to lose your money.
Or if you have car for rent, an accident could not only cause the car to sit for a while, also that will reduce the resell value.
And so on, all investments have risks, which you need to assess before you invest.
Many wealthy people recommend you to invest only 10% of your money, so you won’t go broke, it is called Risk Tolerance, and we will expedite on below:
RISK
As we mentioned above, all investments include risk, and to be more honest, everything in life carries risk, few years ago I went from being a business owner to a homeless person drowning in debt. So that means you need to always consider (Emergency Fund)
Emergency fund is very important to carry you through tough times, usually its your monthly expenses X 3, so you are safe for 3 months.
One of the most important things in risk management in investing, is just similar to income. Diversification, the more you diversify, the less risk you have in cases of loss, in other terms, do not put all your eggs in one basket.
So before you chase the upside, protect downsides.
In Financial literacy we should talk about taxes, but it is better to leave it for the upcoming post, because it is very sensitive, and it varies depending on the country, or sometimes the state you live in.
Conclusion:
Financial literacy is about knowing how money works, how it flows, how it grows, how it shrinks, how it goes away, and understanding how to protect it, multiply it, and gradually build wealth with it.
