What is Financial Knowledge?
Financial knowledge provides the ability to skill-fully manage your money. The main aim of financial knowledge is to assist you in understanding the financial concepts that will enable you to manage your funds effectively. Everyone should cultivate their financial knowledge as it’s crucial for good financial well-being.
Having financial knowledge includes knowing how to create budgets, invest, and address loans and interest. Acquiring financial knowledge would also require you to fully understand compound interest, the value of money, opportunity cost, and annualized return.
Why is Financial Knowledge Regarded as Power?
Financial knowledge is regarded as power because it equips individuals with the skill and knowledge to manage funds effectively. Without financial knowledge, the decisions and actions concerning investments and savings would lack a solid background. Therefore, financial knowledge also supports your money management skills, allowing you to make financial decisions and attain financial stability.
Moreover, financial knowledge provides a sound knowledge of financial education and several strategies needed for steady financial growth and success. You will hardly run into debts as financial knowledge will let you understand the best debt strategies. You will understand why financial knowledge is power when you go through the four components of financial knowledge.
What Are the Components of Financial Knowledge?
The four components of financial knowledge include:
- Budgeting
- Debt
- Saving
- Emergency fund
Budgeting is a crucial life skill that helps individuals acquire financial knowledge for managing and planning funds. It’s an essential component of financial knowledge and is needed to keep a close tab on your spending habits. Through good budgeting, you will be able to create an actionable financial plan. The plan will help effectively track your expenses, remove unnecessary bills, and help you spend money correctly.
Debt is your borrowing. You get to spend money that isn’t yours – woohoo!! However unfortunately, you do have to pay it back. For instance, borrowing money from the bank or obtaining short-term loans means incurring debt. Most people perceive debt in a negative aspect, and this explains why understanding debt is essential. There are two types of debts available: good debt and bad debt.
- Good debt involves borrowing money to execute projects necessary for making a living—for instance, paying education expenses or purchasing a home.
- Bad debt involves borrowing money to execute unnecessary projects—for instance, borrowing cash to buy expensive clothes.
Being able to differentiate between good and bad debt adequately will save you from drowning in a sea of heavy debt. Nobody wants that.
Saving ensures your financial wellness, a secure present, and a promising future. One can easily build long-term wealth through proper saving schemes. Keeping a tab on your spending habits allows you to know when to save and when to spend. Important financial goals are achieved through saving.
Emergency Funds serve as a cushion when unexpected expenses come up. Emergency funds should be at least six months’ worth of your income. You can raise emergency funds by simply implementing financial discipline. Saving regularly can also help you excel in life and achieve financial discipline.
Conclusion
Financial knowledge is a significant life skill that everyone should aim to have. Planning finances, budget management, and savings should be adequately taught in school. However, as you know… it’s not. Don’t worry though, you can still learn about it now, at any age.
Remember, financial literacy = financial freedom.
This guest post was written by Fraser at Fire The Boss – a website dedicated to helping people gain more control over their money (and lives).
