The term "financial literacy" is thrown around often, but its definition is somewhat suspect. What does it mean to be financially literate? Does it simply require a general understanding of income and expenses?
Or does it constitute an in-depth comprehension of financial derivatives, options, franking credits and other financial jargon? To be considered financially literate, it’s important to understand the following ideas:
Track Spending, Not Earnings
Before you attempt to grasp alternative ways to make money, you must comprehend all of the ways you spend. I’m not just referring to how much you spent on clothes and coffees this week, but rather costs that are a bit more difficult to calculate. For example, a good understanding of interest expenses on loans and their compounding rates is a good first step.
Also, having a good grasp of your income tax rate, insurance policies and large household bills is a requirement. A confidence in managing personal finances is very much the first step. If you don’t know the interest rate you pay on credit card or car loans, then you may want to do a little homework. Though most people know exactly how much comes in, it's when calculating how much goes out that things can get a bit hazy.
Planning for your finances beyond the end of the month is also a prerequisite for achieving financial literacy. Of course, this does not mean you must possess the money right now to invest for the future, but rather, some direction of where you should be heading. Designating a portion of your income to paying off student loans as well as saving for retirement generally reflects a financially prudent person. Moreover, being aware of the benefits that such actions may provide demonstrates financial literacy. In other words, an appreciation for the long-term benefits of saving and planning is a must.
The Business Section
Financial literacy extends to knowledge of financial products out of your direct control. The finance section of the news usually includes stock and index fluctuations, as well as currency and foreign exchange (FX) movements. The cash rate and its effect on interest rates is a feature of almost all finance sections that is very relevant in today’s economic climate. Property prices, unemployment rates and world economic events are also common features.
So What’s A ‘Footsie’?
A grasp of all of these common finance features is something everyone should have. Stock indexes like the S&P 500 (US stock exchange), Nikkei (Japanese stock market) and FTSE, commonly referred to as "the footsie" (UK stock market), are tools that measure the performance of a representative stock market as a whole. The performance of a country’s stock market is commonly associated with the performance of a country's economy.
Regarding exchange rates, an increase in the value of the USD against the Chinese Yuan, for example, will make it cheaper to buy Yuan with USD, thus making it cheaper to buy the Chinese-sourced goods on which we are so dependent. And regarding cash rates, upon the Federal Reserve curtailing the stimulus program, the rate on US treasury notes will increase, which will increase interest rates and make it more expensive to borrow money. This will make affording loans more difficult.
Financial literacy isn’t out of reach for anyone, and every person should seek to possess it. Although potentially daunting, I encourage everyone, particularly those who feel lost when it comes to finances, to begin to read the finance section daily. After all, knowledge is money — particularly so when considering knowledge of money.
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