Do you really know anything about what to do with your money?

I graduated from one of the top universities in the Philippines. However, it did little, or rather, nothing to prepare me for basic financial realities. OK, I’m not talking about the stock market, mutual funds or insurance. I’m talking about the basics – budgeting, credit cards, paying down debt, saving, retirement planning. No wonder so many young intellectual adults simply toss their salary to a low-interest saving accounts, buy things they can’t afford, or use credit cards mindlessly – they don’t know any better. Nearly every person who graduates from school is financially illiterate.

The good news is that we CAN all become financially literate. It will take work, a lot of study and trial and error. But, if we take our responsibility to educate ourselves, we can not only avoid financial pitfalls, but also grow both intellectually and financially.

Anyways, I’m sure you’re thinking what does it mean to be financially literate? Basically, financial literacy is common sense money management. It’s knowing how to handle your money in a daily basis, and how to prepare for a long and healthy financial future.

To start, here are the basic building blocks of financial literacy:

Knowing How to EARN.

No discussion on financial literacy is complete without a reminder that it is important to earn more than you spend. If you earn less than what you spend, it is time to make changes. You have to increase your income, cut your spending, or do both. It’s pretty basic, yet it’s amazing how many people still have difficulty following it. How you handle your money is your sole responsibility, so try to see whether you could improve on this.

Knowing How to SPEND.

You’re probably thinking, “I KNOW how to SPEND. I don’t have a problem with that!” Well, there’s a difference between ‘spending’ and ‘conscious spending’. It’s the knowing the difference between buying things you want versus the things you need. Needs are requirements for survival — food, shelter, clothing, and sometimes transportation if you need it to get to work. Wants, on the other hand, are things that we can survive without. It is also being able to recognize when you can afford to do one, both or neither.

Knowing How to SAVE.

Saving money is something you should NEVER continually compromise. It must be done (no matter how many excuses you have for not putting money aside). If you’re not doing it, start now. This includes setting money aside in an emergency fund, as well as planning for retirement. Costs are only going to rise over time, and you never know when disaster will strike. Start with a small amount regularly, and see if you can slowly increase it over time. In addition to funding future purchases, saving enables you to be prepared for emergencies (and away from emergency debts).

Knowing How to PAY DOWN DEBT.

We may need to accrue debt at some point. The most important consideration when buying on credit or taking out a loan is whether the debt incurred is good debt or bad debt. Good debt is an investment that will grow in value or generate long-term income. Bad debt is debt incurred to purchase things that quickly lose their value and do not generate long-term income. Remember, stay clear of bad debts. Be it good debt (business loans, mortgage) or bad debt (credit card debt), just make sure to stay on top of your payments.

Knowing How to GROW YOUR MONEY.

Hiding your money under you mattress or placing it in a regular savings account won’t do much for you. Figure out how much you you can set aside for your investment, and depending on your risk profile and time horizon, invest your money in stocks, mutual funds, bonds, etc. Remember, when it comes to investing your money for your future needs, time can be far more valuable thanks to the effects of compounding interest.

So, what other basics of financial literacy we should know about?

photo credit: Numbers And Finance via photopin (license)