Financial literacy helps you understand your personal finances better, so that you can improve your financial well-being and invest in building personal wealth. Financial literacy skills can help you make better decisions about money and create a more secure financial future for you and your family.

This series of blogs aims to improve financial literacy regarding different components of financial planning, from budgeting and investing to getting insurance cover and responsible debt use.

What should financial literacy include?

You need to understand the basic principles of 5 pillars of wise money management:
 

1. Earning

Your income is the foundation of your lifestyle and your financial future, so your first financial goal is a reliable, regular income – whether you earn it at a full-time job or as a freelance entrepreneur. Tailoring your lifestyle to live within your means while using debt responsibly is the next step, to find ways to set money aside for your life goals.

2. Spending and budgeting

The only way you can stay in control of your finances is by creating a budget, so that you can track your spending and not buy anything that isn’t in your budget. Calculating a simple 80–20 budget means you allocate 80% of your available income to your total expenses (including leisure and lifestyle costs), and 20% to your long-term savings and investment planning. It may take discipline and the sacrifice of certain non-essentials to ensure you spend only 80% of your income, but long-term investment is key to building wealth.

3. Saving and investing

If you create a strict budget and stick to it, you can put aside money for savings and investments. You could also consider boosting your investments with your year-end bonus. Potential long-term investments include buying a house or contributing to a pension fund that will enable you to maintain the same standard of living when you retire. Practise financial discipline, and you can use the money you’d usually spend on optional monthly expenses to save for more rewarding future goals.

4. Borrowing and managing debt

Don’t be afraid to apply for a loan if you can afford the payments comfortably. Borrowing responsibly allows you to buy items that enhance your life or your earning potential – and provided you pay off debt on time and in full, it can help keep your credit score healthy.

A good credit score gives you access to more credit, which is helpful when you need a home, vehicle or student loan. The key is to check that your budget can afford the monthly loan payments. Authorise a debit order to make the payment automatically every month, to ensure that you pay every instalment on time.

5. Insuring and safeguarding your assets

You need to protect your financial assets – your income, savings and investments. Income protection insurance covers you if you’re retrenched, become disabled, or suffer a dread disease. It’s best not to dip into long-term investments early (even for an emergency) because this can significantly reduce the eventual return on the investment.

The solution is another savings account – an emergency fund that you can access quickly to cover any unexpected costs. Ideally, this emergency fund should have enough money in it to replace your income for 3–6 months. Once you have that amount saved, you can switch your monthly contributions to medium- and long-term investments that offer higher returns.

It also makes financial sense to insure your home, home contents, health, vehicle, and life. All these types of insurance may feel like grudge purchases, but in return for your premium they offer you protection at a time when a loss could cause you major financial upheaval.

Key financial literacy terms

• Budgeting: The process of prioritising your needs and obligations and dividing up your income to cover these costs.
  
  
• Credit score: A number that credit bureaus assign to you based on your credit history, which lenders use to help them measure the risk of granting you credit.
  
  
• Emergency fund: Cash reserves that you set aside for financial emergencies or unplanned expenses. They should equal 3–6 months of your income or expenses, held in an account that you can access easily.
  
  
• Expenses: Costs that your income needs to cover every month, including water, electricity, internet and phone bills, rent or home loan payments, food, transportation, and other lifestyle costs.
  
  
• Income: All the money you earn – including wages, salaries, tips, and other sources of income.
  
  
• Inflation: An increase in the price of goods and services over time that reduces the buying power of your money.
  
  
• Interest: The percentage that a lender or bank will charge on an outstanding balance when you borrow money, or the percentage that financial institutions will pay you in return for keeping your money in accounts and investments.
  
  
• Investment: A financial instrument or physical asset – such as stocks, bonds or property – that you can buy to earn a financial return as it increases in value.
  
  
• Risk: An estimate of the possibility that a specific transaction, investment or investment portfolio will expose you to financial danger, harm or loss.
   

Contact a Nedbank financial adviser if you need help with financial planning.