Financial Literacy: What It Is and How to Improve It as an Adult

Contents:

• What is financial literacy?
• Why improve your financial literacy?
• What knowledge and skills do you need to become financially literate?
• What is a personal and family financial system?
• How to learn financial literacy as an adult?
• What is the basis of a financial strategy?
• How to set financial goals and achieve them?

What is financial literacy?

Financial literacy is knowledge about how to move towards financial well-being, cope with crises and reduce the level stress related to money, use financial products. And the ability to apply this knowledge.
A financially literate person is someone who:

• knows how to plan a budget and keep track of expenses and income;
• knows how to create a safety net;
• works with their behavior and thinking;
• Savings in accordance with their financial goals;
• Assesses market risks;
• Aware of financial fraud and how to protect themselves;
• Understands their rights as a taxpayer and consumer;
• Knows how to work with information;
• makes informed and transparent decisions.

Why improve your financial literacy?

This will relieve you of unnecessary stress both in everyday life and in crisis situations.
Financial literacy is the basis for conscious behavior, which gives confidence in the future. Financial literacy skills allow you to spend less and save more effectively, avoid conflicts with loved ones about money, and achieve your financial goals faster and more efficiently.

What knowledge and skills are needed to become financially literate?

Sustainable financial development in a family is a subjective concept. It is determined by feelings and depends on whether there is a balance between the present and the future. For example, when you don’t limit your daily consumption when you have a big goal, you can afford to go to a restaurant and not worry later that you haven’t put money aside for a mortgage.
We are personally responsible for the stability of the system, so it is necessary to constantly develop financial literacy skills.
Soft skills include:

• critical assessment of information - for making financial decisions;
• discussing financial issues with family members and market participants;
• Finding motivation to work with personal finances;
• Creative thinking - to achieve goals with limited resources.

Hard skills include:

• Personal and family budget management (accounting, control, analysis, planning);
• Setting financial goals;
• Informed choice of financial products from the existing variety;
• Family asset management (savings, investments, loans);
• Building a family and personal financial system.

What is a personal and family financial system?

Each person exists within different financial systems - personal, family and general economic.
In the general economic system, a person and a family (household) are connected with the state, the market for goods and services, financial markets, and the labor market. It is formed by external factors that influence the financial well-being of the household, such as unemployment and inflation, government support options, the business climate, and so on.
Family finances are influenced not only by external factors, but also by internal ones: its values, needs, resources, goals, assets, liabilities, and risks. Therefore, the family financial system is an independent system.
And then there is the personal financial system. After all, if a person has a family, this does not mean that he is only a part of the general economic and family financial systems. He certainly has personal obligations and needs. For example, you have a common family goal - to buy a car, and at the same time a personal one - to buy a Dyson hair dryer. There is money that you put into the general budget to pay the installment on the car loan, and there are personal funds that you can spend on purchasing equipment.
If we consider more practical actions, then to create a prosperous financial system you need:

• a financial reserve (at least for three months of life without a main income);
• regular income from several sources (active and passive);
• an asset level exceeding debts;
• positive difference between income and expenses in the family budget;
• protection of the life and health of the main breadwinners.

For example, your family has one source of income. Then this is a reason, firstly, to think about searching for new sources (find a job for the second family member, monetize a hobby, find stable and profitable investment offers), and secondly, to take care of the life and health of the main breadwinner.

How to learn financial literacy as an adult?

Learning something new as an adult is not always easy. Every adult already has life experience, a level of trust in certain experts and motivation, an amount of free time, psychological attitudes related to finance, and so on. But even with all this baggage of personal characteristics, it is possible to improve the level of financial literacy.
Here are some tips to get started.

• Think about your personal motivation for studying. Let's say you're unhappy with the fact that your salary is barely enough: everything goes on rent, food, and children's activities. There's no money for savings, leisure, or sudden "wants." In this case, your motivation will be to improve your quality of life and create a secure future for yourself and your children.
• Relate theory to practice.If experts tell you to invest in shares of large corporations, and your wealthy friend is already doing so, this doesn't mean you should follow their lead. Critically evaluate how close a financial instrument such as investments is to you, whether you have spare money for it, and whether you are ready to lose funds in a risky situation. If you are not ready, try to find opportunities that are comfortable for you. In the same investing, less risky options include bonds, government investment accounts, mutual funds, and real estate.
• Schedule your time. Becoming financially literate is your educational goal. Find time for it when no one will distract you. This can be weekends or short morning classes before work.
• Keep a diary. Financial literacy is theory and practice. Take notes from your lessons and set specific goals for yourself right away. When you complete a task, cross it off the checklist.
• Get support. Share your results with family and friends, and even better, find like-minded people who have also decided to improve their level of financial literacy. For example, your goal is to create a reserve so that you don’t have to work for a year, and your spouse’s goal is to save up for a new car. Try sharing your interim results every month.
• Don’t scatter your attention across a huge number of information sources.Choose a couple of sources that you trust and study everything from them. When it's time to deepen your knowledge in a particular area, you can find another resource.
• Do practical assignments. Always remember the specifics of the area of ​​knowledge you are working with. Financial literacy requires practice. Let's say you learned about budgeting. After the lesson, sit down and make a table of your expenses, income, and savings, and draw conclusions.
• Use critical thinking. Don't blindly trust experts, question the decision, ask yourself why it is so, how it can be done differently, is there a more effective option, and so on. Write down your thoughts and objections in a diary; after a while, you will be able to provide arguments against them that will help you move forward.
• Don't let negative experiences get the better of you.If you haven't done this before, that's okay. If you couldn't complete a task or didn't understand the topic, don't beat yourself up; it happens to everyone. Just give yourself time and try again.

What is the basis of a financial strategy?

Personal finance management is not based on money, but on emotions and desires, which over time develop into goals. Money is just a tool for implementation.
To find a balance between current consumption and future plans, you need to practice mindful behavior. This will help you more accurately understand your true needs and ultimately form a financial strategy.
Sometimes we choose to spend in the present, while forgetting about the future. The present seems more foreseeable, while doubts and fears arise about the future. In any case, you need to be aware of the risks that can arise and jeopardize financial planning.
Dreams and desires are limitless, but finances are limited. Therefore, it is necessary to be able to set priorities - to analyze the most significant goals.

The "Wheel of Life Balance" technique will help with this. This exercise is used to identify areas of life in which a person feels satisfied and dissatisfied. But once you have a general idea of ​​why you're dissatisfied with your life, you can begin to understand the role finances play. For example, you might notice that you're tired because you haven't taken a vacation in a while—and this may be directly related to your income level.
Rate each area of ​​your life on a scale of 1 to 10 and color the corresponding number of boxes in each quadrant. You can determine the number and names of your life spheres personally for yourself.

How to set financial goals and achieve them?

Financial goals are desires, plans, and dreams expressed in money; this is what is essential for building a personal financial strategy.
To better understand what financial goals we may face at different ages, let's look at the line of people's economic activity. As a rule, a person's life is divided into the following stages:

• Childhood and adolescence (up to 18 years) is the stage when there is no financial responsibility yet, but there is already an opportunity to learn how to earn and manage the money that parents give.
• The period of financial formation and active work (18–60 years) — this period is associated with financial stress, because the number of tasks and desires increases and you need to be able to manage the available funds so that there is enough for everything.
• Financial maturity, retirement (after 60 years) — the stage at which Income is declining. The standard of living depends on how well a person prepared during the period of active work.

This tool allows you to look at life from the outside and understand which goals and plans may be of primary importance at any given moment. Thus, by priority, goals can be divided into:

• Main.Unfortunately, few people think about how they will live at a time when they cannot work at the same pace as during the period of active work. But creating passive income or simply savings, thanks to which you can live with dignity in retirement, should become one of the main financial goals. The main goals can also include creating a financial safety net and paying off loans.
• Significant.Here you can name the purchase of real estate for living now, children's education (or your own), start-up capital for children (in the form of real estate or savings).
• Other.Plans for the near future - buying a car, traveling, treatment, large purchases for At home.

All these goals are of different scales, but the method for achieving them is universal. To set goals correctly and achieve them, we recommend using the SMART method. According to this methodology, the goal must be specific, measurable, achievable, relevant, and time-bound.

1. Specific. Improve your professional skills by taking an online course on top management and team management.
2. Measurable. The course costs X thousand rubles.
3. Attainable. Yes, I have savings (5 thousand rubles) and a part-time job (3 thousand rubles a month).
4. Relevant. Yes, without this there will be no promotion or career growth.
5. Time-limited. You need to receive the required amount within three months and begin training.
Once your desires have been transformed into specific goals, proceed to the calculations. You can do them yourself or use ready-made financial calculators. At this stage of your financial strategy, consider not only how much money you'll need, but also the inflation rate and the rate of return on your chosen savings vehicle.
You can master financial literacy at any age, and you can improve your level. It's important to do this gradually and thoughtfully, so that the financial aspect doesn't feel intimidating or overwhelming.