[The Conversation]

Are you financially literate? Here are 7 signs you’re on the right track​

With the cost of living and interest rates rising, a growing number of Australians are struggling to manage their finances. Many are experiencing real financial stress.

But even in the best of times, managing your finances is hard. Every day, you’re making complex financial decisions (some of which carry huge ramifications) and there are more financial products and services available than ever before. Navigating this minefield can be overwhelming and lead to financial anxiety.

Being financially literate helps. But what does “financial literacy” mean in practice?

Here are seven signs you’ve got the basics covered.

1. You track your cashflow​

By tracking your cashflow on a regular basis, you’re ensuring your expenses don’t exceed your income. In other words, you make sure you’re earning more than you spend.

A good sign you’ve successfully managed your cashflow is that you have a surplus or a buffer.

These left-over funds can be used to boost savings, pay off debt or meet other financial commitments.

Cashflow management allows you to assess whether there are opportunities to increase your savings and/or reduce spending. Being able to manage your earnings and spending is a key financial skill.

Do you know where your money goes? Photo by cottonbro studio/Pexels, CC BY​

2. You have a budget – and you follow it​

Setting and following a budget requires financial discipline, which is a key part of financial literacy.

By following a budget, you’re putting a measure in place to live within your means and reduce the risk of overspending.

With all the competing demands that come with managing money, your budget can be a tool to keep you on track. And developing this habit over time can empower you to make wise financial decisions.

3. You understand the difference between good debt and bad debt​

Love it or hate it, debt forms part of our financial portfolios and sustains the financial institutions we interact with. Knowing how to make debt work for you is a skill and a sign of good financial knowledge. It is crucial to understand the difference between good debt and bad debt.

Good debt is debt used to improve your long-term financial position or net worth, such as a home loan.

Bad debt tends to be consumption-driven and doesn’t have lasting value. Examples include payday loans or retail accounts.

Do you have a budget to keep you on track? Photo by RODNAE Productions/Pexels, CC BY​

4. You have your money in various places​

One of the key concepts of financially literacy is understanding the importance of diversification.

By having your money spread across various places (such as a savings account, property, the share market, superannuation and so on), you’ve reduced the concentration of risk.

This helps protect your wealth in tough economic times.

5. You understand how financial assets work, along with their pros and cons​

Financial assets refers to things like cash, shares and bonds. It’s important to understand how financial assets work and how they can either help or hurt your financial position.

For instance, savings accounts are a safe financial instrument that earn interest on the amount accumulated within the account. But the fact they’re so safe also means that they won’t outperform inflation.

This type of knowledge is an imperative part of financial literacy.

6. You’re aware of your financial strengths and weaknesses​

Financially literate people reflect on their capabilities.

When you can appreciate where your financial strengths and weaknesses lie, you can make better financial decisions and prioritise your needs.

On the other hand, being oblivious to your strengths and weaknesses means you miss opportunities to improve your financial health.

For example, perhaps you buy unnecessary stuff when you feel sad. Or maybe you panic when faced with tough financial choices and make quick decisions just to make the problem go away.

Neglecting to reflect on patterns of behaviour can lead to serious and possibly irreversible financial mistakes.

Understanding debt is important. Photo by Mikhail Nilov/Pexels, CC BY​

7. You set financial goals and put measures in place to meet them​

Financially literate people plan for their finances. This involves setting goals for either earnings, savings, investments, and debt management or putting measures in place to protect wealth (via, for example, insurance to protect your wealth against loss).

Setting goals is one thing, but it’s also important to have a system and habits in place to achieve them.

Make sure you understand what you’re trying to achieve with your goals, why the goals are important and how you’ll achieve them.

Boosting your financial literacy can feel tough at first. But tackling your finances head on, controlling spending, participating in financial markets, handling debt, being able to understand financial assets and working towards financial goals can help you feel in control of your financial situation.

Everyone’s financial situation is unique, so none of what I’ve said here should be taken as financial advice. You can find free financial counsellors via the government’s MoneySmart site and if you need help with debt, contact the National Debt Helplineon 1800 007 007.

This article was first published on The Conversation, and was written by Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of Canberra

 

[Staffordshire Whippet]

"Buy low, sell high!"

 

[Pommyoz]

Was taught that at school, I passed with flying colours. We do all of this.

 

[SGH]

If you don't have the money to pay for it, you cannot afford it. Plain and simple. And if you don't earn any money, you cannot afford it. Be realist people, there's no genie in a lamp out there waiting just for you. You have to get off your butt and earn every dollar and cent, it doesn't matter if you clean cars for a living, as long as it's an honest wage and you are proud of yourself, you will prosper.

 

[mylittletibbies]

I was very lucky to have parents who were money wise and bought my brother and I up with good money skills.
I am not wealthy, but I own my home, a decent car and no debt so in these trying times for so many people I am eternally grateful to my parents who taught me how to look after my money.
I have tried to pass these skills onto my own children, and as Meatloaf would sing "two out of three ain't bad"

 

[MindyMac]

When I had to finish work earlier than planned because of my birth disability. I worked for 35 years. I was approved for the Disability Pension and had to re-assess everything. I started to keep records of Pension Income and out-goings. I kept one bank account and kept my credit card. I pay off my credit card every month and with a little extra as well as the credit cards have Interest Free Periods. Most months I even try to have it $In Credit before the 'close-off day' so that the statement reads $$$$ so much in credit. If I do not have enough funds to do this I ensure that there is one more pension payment date before the card payment date. If that Pension date is the same date the card is due, then one goes to the actual bank and put the money into that credit card account. Never BPay as the BPay can take a couple of days, then you are late. You will incur interest for an entire month, on all the payments and all the other payments you may be required to pay, like electricity, Greenslip, Pink slip ..

I also now pay my Private Health insurance in full each March for the entire year. The same with Home Building & Contents insurance, Car insurance, .. not doing this each person is paying about $200 or more on each policy just by paying monthly. It took me until 2017 to fully achieve this, but I did it. I have now saved approximately $3,600 already and this saved figure will only increase throughout 2023 when more policies come up for renewal. Yes, it was extremely difficult to achieve this and I went without but look at what I have achieved. I'm already approximately $3,600 better off.

I keep written paper records of my spending each year, including a food diary. I know how much I spend on chicken in 2022, 2020, 2019, 2017, 2016, 2017, 2016 and 2015 .. even apples, even toilet paper. I know what the pension was in May 2015 when it completely started for me. I know what my bills were then and just paid. I added up everything and divided the amount by the number of days for that year. Obviously Leap Year was 366 days. So, I know how much it cost me for each day for everything including light bulbs. Everything spent is recorded and I mean every single cent.

I also keep my monthly credit card records so I know exactly how much I've spent on the card and know how much more I can charge to the card and stop. I earn points and use the Card Reward Points to pay for Annual Fees. I do the request for the points when the annual fees are due.

I do all of these in note books. The old fashioned way and these books, pens (black, blue & red), pencils, ruler, liquid paper .. they sit beside me every single day and are never ever put away. They sit in the lounge because they now have Pride of Place. They are there to help me as I know that I can not remember myself all the expenses. I now know what has been paid by cash/eftpos and by card. I know how much my credit card is in credit and gleefully take this off the speding = $Amount Due for that statement month. I have written out the full year in my book ready for the card statements ahead for the entire year. The pages are ready for each card statement period. Plus, with the bank I use, the statement dates vary from month to month but I have calculated that my bank allows 15 days for the payment date due. It may be 16 days like in Leap Year and it's rarely on a Thursday or Friday. Why, because the banks know that most people get their wages on a Thursday or Friday. The payment also can never ever be on the weekend or on a Public Holiday. Not Ever.

Every person needs to invest some money in exercise books, pens, pencil, rubber, ruler and just start. Start keeping records on what you spend. Companies do this and so should every single person. I know some are great on computers and use Excel but I'm no good at that. Plus, paperwork works for me. I can open the paperwork beside me in seconds and I have everything at my fingertips.

 

[MindyMac]

I was very lucky to have parents who were money wise and bought my brother and I up with good money skills.
I am not wealthy, but I own my home, a decent car and no debt so in these trying times for so many people I am eternally grateful to my parents who taught me how to look after my money.
I have tried to pass these skills onto my own children, and as Meatloaf would sing "two out of three ain't bad"

I taught myself. It took me a while to get there but every single person can learn even later on in life. As they say 'It's never to late learn and to start.'

 

[mylittletibbies]

I taught myself. It took me a while to get there but every single person can learn even later on in life. As they say 'It's never to late learn and to start.'

Congratulations to you on your wonderful effort. My daughter also has a disability and I have tried to help her to learn how to take care of her money.
Unfortunately, due to her disabity she is not able to do the record keeping you do, this is beyond her abilities, but she has managed to put together a healthy bank account and has a 1/3rd share in a house that she owns outright
I also myself keep a paper record of all my incoming/outgoings, have a budget and put aside enough money every fortnight so that I can always have my bills covered by direct debit. It takes discipline, but anyone can do it if they try.Unfortunately if you do not attain these skills when you are young, waste money on drink, drugs, gambling whatever and not look to the future life can be difficult
The pension is not enough to live on if you haven't managed to get your own home by retirement age then you are in for a pretty miserable old age.
I think these skills should be taught at school instead of some of the subjects that are taught that are of no use to you later.