In short terms, debt is money a person uses that isn’t their own. For whatever reason that may be, debt handling and managing is a vital skill for anyone planning or not planning to take out a loan or borrow money from a different source. The immediate time a person takes money from an external place, they are deemed to be in debt. This borrowing of money can be from a multitude of different places, most notably: banks, through the usage of credit-cards, short term loans, or payday loans. More specifically, you can also have debt for certain assets such as houses, which come in the form of mortgages. As a result of this accumulation, knowing the strategies to deal with and keep up with installments to relieve this debt is one of the four fundamental pillars of financial literacy.
Debt can be split into two categories, good and bad debt. Good debt usually consists of money put aside for absolutely indispensable needs, some of which are the payment of a house, cultivating businesses, and funding an education. These examples, in the long run, can help those who take out money for these causes have a more straightforward time in paying off the debt, rather than struggling to make payment deadlines. On the other hand, bad debt typically consists of borrowing money or using a credit card for things that don’t benefit the person or set them up in the future to pay the debt back easily. In other words, they primarily involve leisurely goods such as expensive clothes, vacations, and more.
2. Saving
The pillar of saving is one that can be most useful, when set up early and done properly. It encompasses the idea that a majority of a person’s income should be put aside for financial security and future wellness, with the remaining percentage being used in the present. The utilization of this money can be categorized into three different parts.
Firstly, it is used for realizing future goals, primarily through the means of sending children to university, paying off loans/debts, or securing a peaceful retirement, where the imminent idea of sustaining a normal life is not a worry. Secondly, the right implementation of saving eases a lot of added pressure when it comes to unexpected casualties. These include home or car repairs, illnesses, or unemployment. The money allocated for these circumstances should usually last 3-5 months. Thirdly, the accumulation of a little bit of money can also be used for spending on certain leisurely items, like vacations every once in a while.
3. Budgeting
The third pillar of financial literacy is budgeting - knowing how to plan, manage and effectively utilise your money.
Being aware of where your money goes is absolutely crucial for financial security. Allocating short and long-term expenses allows you to keep track of your money, make wiser choices and refrain from impulse buying.
The golden rule: the money coming in (your total income) should always be greater than money going out (your total expenses)!
4. Investing
Last but not least, investing is the fourth pillar of financial literacy. It’s perhaps what people find the most challenging due to fears of risks and uncertainty and losing their money altogether. So make sure to know exactly what you are investing in.
Investments can be understood as your second source of income. The aim of all investments is to accumulate worth over time so that you have more money than what you originally invested. It’s all about placing your money into something that will generate profit over time, such as shares or real estate.
As you work towards growing your wealth and a financially secure future, invest some time into understanding the four pillars of financial literacy.