In this era of rising prices and increasing job losses, financial literacy becomes very important to survival. There are stories of wealthy people who end up in penury not because they did not earn enough income during their career or business to last their life time, but because of lack of financial literacy and discipline. They spend all the income earned without saving for the “raining day”. Wealthy people make wealthy nations and poor people make poor nations.
So many people struggle with “making ends meet”, another word for inability to balance the budget. Countries, organisations and individuals prepare their budgets at the beginning of the year or their financial year on the principle that they will spend what they earn. We know that is not always the case as most people and nations spend more than their income as some of the wealthiest nations are living on borrowed funds. Other known casualties of lack of financial literacy and consequently lack of financial planning include some celebrities and sportsmen.
Financial literacy is a skill everyone should possess from early age whether rich or poor. The current socio-economic crisis in the word makes it inevitable. Middle class is being wiped out in several societies and countries due to lack of financial planning, literacy and discipline. Whilst this skill might not guarantee one remaining in the middle class, it will ensure that one lives a comfortable life.
I found the simplest definition of financial literacy in Wikipedia which defines it as the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources. The key word being “all of their financial resources”. Why is this important? Some people believe only wealthy people make financial plans and less wealthy are not able to make financial plans due to their limited resources. The secret to successful financial management is to ensure you do not spend more than you earn.
A decrease in your income will lead to a decrease in your expenses. In addition, increase in prices without increase in your income will lead to decrease in the amount you can spend which in some cases could lead to decrease in living standard. Some people in an attempt to maintain their living standard in the face of increasing prices end up in debts by borrowing. That is why so many people today borrow from banks, retail shops through credit cards and in some cases from loan sharks.
I will try to keep it simple. To balance your books, your expenses must be equal to or less than your income:
Expenses ≤ Income
Where, ≤ = less than or equal to
If your expenses are less than your income, you are left with excess income which you can invest. There are various investment options opened to you which will be subject of another article. You can also consult a financial adviser for investment options.
Income includes; salaries, wages, income from investments such as savings or business. Expenses are those payments made that will not yield any immediate or future income. These include cost of; transportation, groceries, electricity, telephone etc. To create wealth, you should ensure that your income is more than expenses.
Inability to manage finances could be linked to lack of financial discipline, lavish life style, societal pressure and expectations. Ways to manage your finance to balance your books includes:
- Preparing a budget that gives you a view of your income and expenses
- Ensuring that your expenses are not more than your income.
- A reduction in your income should lead to a reduction in your expenses to balance the budget which in some cases could lead to reduction in standard of living. In this instance, you should be prepared to give up non-essential items.
- Price increases should lead to reduction in the quantity of items purchased. To insist on purchasing the same quantity of goods to maintain living standard will lead to debt.
- Always look for opportunities to legitimately increase your source of income in the face of rising prices. This might include acquiring new skills which will make you more marketable or set up your own business to earn additional income.