Personal Financial Literacy For Beginners – What You Need To Know

Personal financial literacy is the only knowledge that entails everyone to learn

Unfortunately I did not learn anything about financial literacy for beginners at schools

Also I was not lucky as my parents did not teach me basic financial literacy

I had to join the workforce and learn my financial knowledge all by myself

personal financial literacy for beginners

On my financial journey, I stumbled upon one financial advisor and writer I really like

He shaped my mentality on how to think about financial matters in one of his books

His name is Dave Ramsey and his greatest book is called Total Money Makeover

I have seen so many people I personally know commit nonsense financial mistakes

That's why I decided to write this post

I will do my best to teach you the basics of financial literacy

What is personal financial literacy?

Financial literacy is the knowledge about financial concepts that empowers you to make good financial decisions to manage your money and your financial future

There are two paths, learning the personal financial literacy and implementing or doing them in your life

Do you need financial literacy?

Yes, everyone needs to be equipped with the basics financial knowledge

Everyone should learn everything about his personal financial literacy as one financial decision can cost you thousands of dollars and some debt to pay

I will give you an example, you go to a car dealership and buy a brand new car with no down payment and 3.5% APR – Annual Percentage Rate for 5 years

You think it is a great deal

Now you buy the car and after 2 years you lost your job and decide to sell you car

Surprise, you discover that your car is not worth its value for the remaining 3 years left in your debt

You sell it today and you pay its sale value to cover the payments

Currently you lost the car but you still have debt to pay

You should have learned that new car loses 15% of its value as long as you switch the engine and leave the dealership

Unfortunately some financial mistakes are very hard to recover

It takes time and energy to fix

Why financial literacy is important to you?

It is not only important but it is critical, if you have the financial knowledge you can avoid financial crisis

I will give you an example, you go to a car dealership and buy a brand new car with no down payment and 3.5% APR – Annual Percentage Rate for 5 years

You think it is a great deal, you buy the car and after 2 years you lost your job and decide to sell you car

Then you discover that your car is not worth its value for the remaining 3 years left in your debt

Today you sell it and you pay its sale value to cover the payments

Now you lost the car but you still have debt to pay

You should have learned that new car loses 15% of its value as long as you switch the engine and leave the dealership

Also you should have learned that buying a car is liability and not an asset

It loses its value every day

Financial terms to understand and learn about

The below list is a good collection of basic personal financial terms to overcome your literacy

It is not hard to learn all the basics like

Assets

Asset puts money in your pocket

Your income is an asset

If you have money in your bank saving account which generates an interest then this money is an asset

Liabilities

Liabilities are anything that take money out of your pocket

Also liabilities are financial obligation like a car loan where you have to pay

Some liabilities like a mortgage is a good liability as you accumulate wealth

Net worth

Net worth is the difference between all of your assets minus all of your liabilities

You can calculate your net worth at any given time by summing all the assets

Home estimate value = $600,000

Saving account = $15,000

Retirement saving account = $80,000

Car estimated value = $12,000

Jewelries and gold = $30,000

Total assets = $600,000 + $15,000 + $80,000 + $12,000 + $30,000

Then calculate your total liabilities as shown below

Mortgage remaining amount = $230,000

Credit card debt= $3,000

Line of credit and loans = $40,000

Net worth = $464,000

Earning an income

You go to work daily and you get paid

This is called active income

There is also what is called passive income or earn while you sleep expression

If you build an asset generating an interest for you like money in a saving account

This will generate income on a monthly basis while you sleep

Budgeting

Budgeting is a process you create like a plan to sort all of your incomes and all of your spending represented as expenses

Where budgeting itself is a process which you do when you build your budget

Saving money

Saving money is a continuous process you pursue by deducting from your income to build short term savings to buy car or home

Also build a long term savings like your kids education and your retirement plan

Interest

Interest is the percentage that any money can make if they are deposited in the right investment channel

It can be money you make if it is an asset or money you pay in case of liability

Principal

Principal is the amount of money you borrow without applying the interest to it

For example, if you borrow $5,000 with 5% interest annually then regardless of what you currently owe right now

Still the $5,000 is known as principal

Investing

Investing your money in one of the investment channels that can generate interest for you is one of the valid ways to build wealth

There are so many forms of investment – the more you collect money in the form of interest, the more it requires to be knowledgeable about this investment type

If you are skeptical then go for saving account or Guaranteed investment certificate (GIC) in Canada or Certificate of deposit (CD) in USA

Debt and types of debt

Debt is any amount of money you are obliged to pay to someone else

You can owe some money to a friend or family member and you can both agree to arrange how to pay it mutually

But that's not I am referring to

I am talking about debt which you owe to a financial institution or a bank

There are two types of debts

Secured debt

When you get a loan to buy something like car or house

This debt is secured with the item you bought

If you don't pay the loan, the financial institution can seize your item which you bought

This is called collateral

Unsecured debt

Any loan you take without any thing to secure in return

Credit cards are typical example of unsecured debt

Loan Term

Any loan which you apply form comes with term

Term dictates the interest rate as known as APR (Annual Percentage Rate) and a duration like how many months you have to fully pay this loan

Amortization

Amortization is used mainly in paying down a mortgage

This amortization is a predefined schedule by which a borrower will pay down a loan with its associated interest, taxes (usually properly tax) and fees

Credit score

In your day to day activities, there is a score that is called credit score

It is always associated with your financial activities which you carry

When you apply for a mortgage or get a new loan even a new credit card, credit check should occur on your profile

Having a good credit score will make any loan to be approved without any obstacles

Benefits of financial literacy

People spend their life pursuing college or academic degrees

Some of them earn good incomes but without a proper financial literacy they end up piling debts

Which can eat most of their income, in a situation that leaves you broke and helpless

At least there are four benefits of learning personal financial literacy like

Staying debt free

If you are aware of all the personal financial literacy

You definitely will not fall in the car dealership trap listed above

You cannot imagine how stressful to get a debt you have no control about

For example, if you co-sign a loan to help a family member or a friend

if he/she cannot pay, this debt becomes yours

Increasing your net worth

Taking care of your spending and using a family budget, paying all your debt is not enough

You should take your budget to the next level by investing your saved money and thus increasing your net worth

Less anxiety and stress

Knowing your financial rights and following the right path means less anxiety and stress

There is nothing better than the feeling of paying all of your debt

There are so many people who lose their sleep worried about what will happen tomorrow if they are not able to cover their loan payments

Good outstanding in terms of family budget

Having a good personal financial literacy means you believe in building a budget with your spouse

At the same time, building a budget with your good financial knowledge means building it the right way

Doing it the right way means having good outstanding budget

What to do after learning basic financial literacy?

You now know the basic terms in daily financial knowledge

What is next for you to do?

Read more especially simple financial books

I recommend you read Dave Ramsey's book called Total Money Makeover

Attend financial classes

You can attend many personal financial literacy classes with affordable price like Udemy

Start your own budget

If you did not start your own budget then what you are waiting for

Without a household budget you will not be able to know where you spend your money

You have to find many ways to cut in your expenses and put it against your debt or save and invest it


Michael launched Wealth of Geeks to make personal finance fun. He has worked in personal finance for over 20 years, helping families reduce taxes, increase their income, and save for retirement. Michael is passionate about personal finance, side hustles, and all things geeky.