Financial Literacy is a Step Towards Financial Freedom

• By Rachel Snowden

Why do we need financial literacy? In fact, the answer to this question is obvious. We all know that any progress is based on knowledge, its development and use. It's the same with finance. Your financial progress is based on your financial knowledge, its development and the effective use of this knowledge.

Well, let's take a look at what financial literacy is and what basic skills we need. Financial literacy is the set of knowledge and skills in finance and the ability to effectively use these skills in practice.

The basic knowledge that we need may include (the presented list of skills is not exhaustive):

• understanding of your assets and property that generates income;
• understanding and managing your obligations;
• accounting for personal income and expenses;
• the ability to plan (planning purchases, short-term and long-term financial plan);
• knowledge of financial instruments and the possibilities of their use (bank deposits, stock market, foreign exchange market, precious metals, etc.);
• understanding loans and calculating the obligations assumed;
• understanding of taxes and the possibilities of obtaining tax benefits, deductions, refunds;
• understanding of insurance and the possibilities of its use (term life insurance, property insurance, cumulative insurance, medical insurance);
• planning for retirement (state pension, non-state pension funds).

So, at the initial stage, you need to learn how to divide your cash flows:

• current income;
• current expenses;
• savings;
• investment, etc.

You need to learn how to control your income and expenses, it is not difficult to do this. You can record your daily income and expenses in a diary, in an electronic document, but the most optimal option is to use special programs or applications. This will allow you to visually see all areas of spending money, optimize costs and save you from rash purchases.

The next step is to work on increasing income, building up income-generating assets, creating passive income, reducing unnecessary expenses, etc.

We all use our income in different ways:

• someone spend more than they earn;
• someone spend everything that they earn;
• someone spend less than they earn and direct money to savings and investments.

A financially literate person chooses the third option - to spend less than he earns and directs money to build up assets, investments, save, etc., the first two paths are dangerous and can lead you to a financial crisis.

This will allow you to create alternative sources of income, such as passive income. Passive income is income that does not depend on your daily activities and you can receive it even on vacation. Passive income will give you the opportunity to create a financial security zone not only in the present, but also in the future.

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This is why financial literacy is essential for all of us. You just need your desire and time. By studying various educational materials in the field of economics, finance and investment, you will improve your financial knowledge and skills, be able to competently manage your income and expenses and increase your personal capital.