Home Business Personal Finance vs. Financial Literacy (Difference Explained)

Personal Finance vs. Financial Literacy (Difference Explained)

by Logan

Managing your finance is the first step toward a secure financial future, but that requires a basic knowledge of various financial skills and concepts. The financial lingo can be quite daunting with terms like compound interest, time value of money, debt management, and credit score, it can be a bit overwhelming.

But no matter how hard it seems, having some understanding of finance and money management is a basic requirement irrespective of your age or financial status. Only then you can control your finances in a way that results in a stable present and a bright future.

What Is Financial Literacy?

Financial literacy is the understanding and knowledge of how money works. Having a paycheck is just the tip of the iceberg, knowing how to manage it is what matters.

The understanding of how to save, spend, manage your debts, and invest is all part of financial literacy. This will help you make smart decisions and take calculated risks when it comes to investments and budgeting.

Irrespective of how essential financial literacy is, not everyone gets the opportunity to be financially literate from an early age, but it’s never too late.

With the world moving towards digital currency, keeping track of your money can be difficult. Spending more than what your finances can withstand will eventually result in crushing debts. Therefore, it’s always wise to plan your finances.

Why Is Financial Literacy Important?

Financial literacy is the key to financial stability.

Over the past decade or two, much in terms of the lifestyle, available resources have evolved. The role of government when it comes to providing a financial safety blanket has grown slender.

The needs and living standards of people have improved, but the constant compulsion to sustain it makes long-term financial planning impossible.

But doing so will help you become more mindful of how you spend your money and will save you from a financial downfall.

How Can You Improve Your Financial Literacy?

Financial growth does not come without financial literacy.

Financial literacy often gets ignored in the early life stages as it’s not taught as a subject in many schools when in fact it has the most practical use.

You can improve your financial literacy by taking a few basic steps.

A good starting point would be being aware of your net and gross income.

Many employers or companies provide self-funded retirement plans or health insurance that’s deducted from your total income. Having this knowledge will take you to the next step.

Having an understanding of your monthly expenditure and how much you spend on your necessities will help you plan your finances better.

If your monthly expenses exceed the incoming money, you’re likely to face debt or a financial roadblock.

Make sure you spend in a way that leaves some room for savings and investment. We will get into the details later.

The more you are in control of your finances the better relationship you have with your money. Finances can get complex but make sure you are aware and learn about every financial decision you make.

What Is Personal Finance?

Budgeting
Personal Finance

Personal finance is managing your finances while being financially literate.

Financial literacy enables you to make informed and smart decisions that benefit your short-term and long-term financial goals.

Personal finances include investing in the right place, planning future financial goals, and managing debt and credit.

Having long-term financial prospects will help you spend a life free from financial distress and troubles. When it comes to financing, making the right decision at the right time is key.

How Does Financial Literacy Affect Personal Finance?

Having balanced and stable finances requires financial literacy. In America, 66% of the population is financially illiterate. Lack of financial literacy makes you prone to financial fraud and distress.

Managing your finances doesn’t mean cutting your expenses, it simply means smart use of your money so you always have something to fall back on.

Since a large percentage of the population lives from paycheck to paycheck, the concept of budgeting and understanding other financial concepts and skills can be quite difficult. But having the awareness will help you seek the right opportunity for yourself.

The possibilities of investments are endless, but not every possibility will sit right with you. Having financial knowledge will help you play a safe bet with low-risk factors.

Simple Ways You Can Manage Your Finance

So far we have discussed the importance of financial literacy and how it benefits your personal finance. Managing your finances and money is never easy, and the learning never stops, but you have to start somewhere right?

Let’s get into a few basic steps you can follow to expand your financial knowledge and manage your money better.

Budgeting

Budgeting
Budgeting

Budgeting, as obvious as it may seem, is the first step toward financial stability. Even though it’s easy to understand, applying it effectively can be a challenge.

It requires you to keep a check on your spending and restrict yourself from making hasty financial decisions, no matter how appealing they may sound.

Effective budgeting can be achieved by:

  • Keeping track of the amount of money you are spending versus how much is coming in every month. You can use an excel sheet or various budgeting apps to promptly note every essential and non-essential purchase you make in a month.
  • Once you are aware of your monthly expenditure, divide your net income into three categories; fixed expenses, variable expenses, and savings.

Two of the most common budgeting rules are the 50/30/20 and the 70/20/10 rules. Allotting 50% of your net income to your basic needs like groceries, bills, and other expenses you can’t escape. The 30% to your variable expenses, which include going out, shopping, and traveling. Lastly, another 20% for your saving and debt returns.

If you have a debt you want to pay off quickly, you can follow the 70/20/10 rule. It divides your money into three sections, 70% for overall monthly expenses, 20% for debts, and 10% for savings and emergencies.

Investment

Graph
Investment

Investing money is a common method of increasing money flow over time, but it comes with its fair share of risks. For beginners, investing in the stock market is an ideal way to learn about the complexities that come with it.

Investing in a stock refers to buying a specific share of a company. The profit or loss the company makes over time influences the value of your invested money.

One of the major risk factors associated with the stock market is the fluctuations in the stock prices. These fluctuations can be a consequence of various factors such as the company’s performance, the global economy, and the marketing and political environment impacting the industry and the company’s value.

Other investing opportunities include investing in local businesses and real estate investment.

Savings and Emergency

Savings and emergency cash act as your safety net when faced with an unexpected circumstance. Not following a strict budget can result in a financial crisis in case of an unplanned expense, such as a medical or a personal emergency.

Apart from saving for emergencies, setting apart an amount of your net income for future goals, such as buying a car or a house, or setting up a business can result in a secure and comfortable future.

Debt Management

An image of a graph showing trading values
Debt Management

Whether you took a small loan or a big loan, you need to learn how to pay back the sum in a balanced manner.

Being aware of the terms and conditions that follow your loan will help you make smart financial choices. Skipping or postponing your return payments will only push you deeper into the pit of debt.

You can even end up suffering from the dire consequences of not being able to return a loan to a particular friend or family member as it could seriously strain your relationship.

People also end up being bankrupt, they lose their basic income and in the worst-case scenarios, they lose even their house, their property, their car, or other important items.

Bottom Line

Your personal finance translates to your present and future financial status. Financial literacy can prevent you from making poor and uninformed financial decisions. 

Whether it’s debt management or investment, without having the basics of finances checked off you are likely to face a financial setback. Even though finances may seem a complex topic to gain knowledge on, it will help you in every step of life.

Spending money without a plan might seem easy, but it will reap you no benefit in the long run. Keeping a check on your expenditures, setting future financial goals, and following a strict budget will help in exponential financial growth.

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