Financial Literacy – Lessons You Need To Learn

April is recognised as Financial Literacy Month, and undoubtedly, financial literacy is vital for everyone. Whether you are a student or starting your career, or even a professional, understanding the basics of finance can only help you manage your finances well.

Basics Of Budgeting

Money is hard to earn (legitimately) and harder to retain. Without a proper budget, it’s challenging to track earnings and expenses. Whether you are in school or college or starting your career, try to build a budget for a period, say a month or a week. If you are getting pocket money from your parents, write it down on one side of the paper and the other side, keep note of all your expenses that you pay with that amount. For instance, if you buy food from your pocket money, movie tickets, transport, or anything and everything. Try to keep your expenses limited to the amount you have in your pocket. This will help you build a sound financial habit of synchronising your earnings and expenses.

Make Savings A Habit

The next thing you need to learn is to save after you start budgeting. Once you start earning, keep a particular percentage or amount of your salary/ income as savings. Say, for example, you are earning Rs. 50,000 a month, try to save at least 10% of the salary - Rs. 5,000, and keep it aside in a different bank account and leave it alone. This will not only help you accumulate wealth for the future, but you will have a corpus for tough times.

Learn About Interest Rates

Whether you save in a savings account, a fixed deposit account or invest in any other scheme, you will earn interest every year or month. This will help you accumulate wealth over a period. The interest rate varies depending on the saving or investment scheme you choose. For instance, the present base interest rate on a savings account is around 2.7% to 3% as per RBI, now the commercial banks can provide interest as per their choice, but the minimum has to be 2.7%. Another example is the National Savings Certificate (NSC), where the present interest rate is 6.8%. So, the interest you receive is your income for not using the money.

Investments And Risks

Investment options include equities, bonds, mutual funds, and other investment instruments. As an investor, you need to understand your risk appetite first, whether to take a high risk to earn higher returns or take a moderate risk and earn an average return. Accordingly, you can choose an investment instrument.

Benefits Of Compounding

The earlier you start, the more you can accumulate with the help of compounding. This is nothing but earning interest on interest which maximises your returns. Basically, it involves reinvesting the profits earned to accelerate the process of earning interest in the long run. So, compounding - called the 8th wonder of the world by Albert Einstein - is considered the first step towards the creation of wealth in the long term. Finance and financial literacy include endless aspects that one needs to understand and learn over time. Here are the basics you can apply to your regular life starting today.