By Bomikazi Zeka*
With the cost of living and interest rates rising, a growing number of people are struggling to manage their finances. Many are experiencing real financial stress.
But even in the best of times, managing your finances is hard. Every day, you’re making complex financial decisions (some of which carry huge ramifications) and there are more financial products and services available than ever before. Navigating this minefield can be overwhelming and lead to financial anxiety.
Being financially literate helps. But what does “financial literacy” mean in practice?
Here are seven signs you’ve got the basics covered.
1. You track your cashflow.
By tracking your cashflow on a regular basis, you’re ensuring your expenses don’t exceed your income. In other words, you make sure you’re earning more than you spend.
A good sign you’ve successfully managed your cashflow is that you have a surplus or a buffer.
These left-over funds can be used to boost savings, pay off debt or meet other financial commitments.
Cashflow management allows you to assess whether there are opportunities to increase your savings and/or reduce spending. Being able to manage your earnings and spending is a key financial skill.
2. You have a budget – and you follow it.
Setting and following a budget requires financial discipline, which is a key part of financial literacy.
By following a budget, you’re putting a measure in place to live within your means and reduce the risk of overspending.
With all the competing demands that come with managing money, your budget can be a tool to keep you on track. And developing this habit over time can empower you to make wise financial decisions.
3. You understand the difference between good debt and bad debt.
Love it or hate it, debt forms part of our financial portfolios and sustains the financial institutions we interact with. Knowing how to make debt work for you is a skill and a sign of good financial knowledge. It is crucial to understand the difference between good debt and bad debt.
Good debt is debt used to improve your long-term financial position or net worth, such as a home loan.
Bad debt tends to be consumption-driven and doesn’t have lasting value. Examples include payday loans or retail accounts.
4. You have your money in various places.
One of the key concepts of financially literacy is understanding the importance of diversification.
By having your money spread across various places (such as a savings account, property, the share market, superannuation and so on), you’ve reduced the concentration of risk.
This helps protect your wealth in tough economic times.
5. You understand how financial assets work, along with their pros and cons.
Financial assets refers to things like cash, shares and bonds. It’s important to understand how financial assets work and how they can either help or hurt your financial position.
For instance, savings accounts are a safe financial instrument that earn interest on the amount accumulated within the account. But the fact they’re so safe also means that they won’t outperform inflation.
This type of knowledge is an imperative part of financial literacy.
6. You’re aware of your financial strengths and weaknesses.
Financially literate people reflect on their capabilities.
When you can appreciate where your financial strengths and weaknesses lie, you can make better financial decisions and prioritise your needs.
On the other hand, being oblivious to your strengths and weaknesses means you miss opportunities to improve your financial health.
For example, perhaps you buy unnecessary stuff when you feel sad. Or maybe you panic when faced with tough financial choices and make quick decisions just to make the problem go away.
Neglecting to reflect on patterns of behaviour can lead to serious and possibly irreversible financial mistakes.
7. You set financial goals and put measures in place to meet them.
Financially literate people plan for their finances. This involves setting goals for either earnings, savings, investments, and debt management or putting measures in place to protect wealth (via, for example, insurance to protect your wealth against loss).
Setting goals is one thing, but it’s also important to have a system and habits in place to achieve them.
Make sure you understand what you’re trying to achieve with your goals, why the goals are important and how you’ll achieve them.
Boosting your financial literacy can feel tough at first. But tackling your finances head on, controlling spending, participating in financial markets, handling debt, being able to understand financial assets and working towards financial goals can help you feel in control of your financial situation.
*Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of Canberra. This article is republished from The Conversation under a Creative Commons license. Read the original article.
37 Comments
It's a sad reflection on the way the social narrative is going - just when we needed an intelligent one, most.
And, ironically, the piece above, is part of the false narrative which got us into this mess - but I don't think she has a clue. Any more than Easton does, other thread. The economics narrative is all-pervasive - and was just plain wrong. But rather than address that, everyone is coming up with any and all reasons why this, that or the other thing is 'to blame'.
Interestingly, put it under their noses and .......... total non-engagement, followed by resumption of programme.
This morning's contribution:
and how much you are saving. NZ may have no bank savings insurance but it is inconceivable that the govt of any complexion would not cover some amount - say $10,000. They cannot let families literally starve. If I was lucky enough to have say $500,000 in easy access accounts then I'd attempt to spread it around.
I have asked interest.co.nz to do an article on the health of NZ banks w.r.t what sort of investments they hold. interest.co.nz have no interest in doing that. I'm assuming that they think the NZ banks are so stable that there is no chance of a SVB situation here.
Wrong ! We write about NZ banks all the time ! Goodness, you must hardly read our content. Not only do we write about them relentlessly, we provide easy access to tools to analyse and compare New Zealand banks. See this and this. We are over the public data from both the banks themselves and what the regulator releases.
What you seem to be assuming is that we have some special access to their loan books. We don't. No-one outside management, their auditors and the regulators get that access. Ditto in the US. It is easy to fling accusations in hindsight. If you know stuff in foresight, let us know (but not on our Comment stream. If you libel someone, don't expect us to get drawn into that or expect us to defend you.)
There's the rub though - to participate in society, having a bank account is not optional. So either everyone needs to be sophisticated enough to be able to 'choose their bank wisely', or realistically, there needs to be some protection offered to depositors. I think a good middle ground would be allowing retail accounts at the RBNZ, with deposits earning OCR or some fraction of it. Then retail banks can compete for deposits and depositors can accept that there is a risk involved with choosing to banking with them.
Your portfolio is allocated 90%+ to bitcoin held in self-custody.
If you understand what's happening in the U.S., you can see that the ruling elite is attempting to capture the space where normies think they are getting exposure to BTC but they don't actually own it. Just look at the announcements and actions from the likes of Nasdaq, Fidelity, JPM.
Hence the self-custody bit. Paper Bitcoin is equally as useless as paper gold. People need to educate themselves.
Bit different. I have paper gold (PMGOLD and PMGT). Both are redeemable for physical from Perth Mint. Not perfect. But nothing like GLD, which is useless.
Paper rat poison is worthless.
It is a 1 or a 0 on a magnetic strip on a raid disk array, where individual disks can be thrown away without data loss. There is no safety deposit box at a bank data centre. Its fairy dust..... and if you want to change your NZD into USD fairy dust you have to pay a spread because the fairy's have to eat too.....
I agree, financial literacy should be a compulsory part of the curriculum. Too many end up in difficulties as debt is so easily obtained and made attractive.
For many, car finance is an obvious example.
I am also sadly amused how debt is presented or influences us by reference to “credit” rather than “debt”.
”Credit” has positive connotations, “debt” negative ones. Arguably;
“Credit cards” should be “Debt cards”
”Interest free credit” should be “Interest free debt”, and
”After Pay” should be “After debt”.
Just a reminder that in these instances we are taking on debt and the use of the negativity of “debt” is more appropriate perspective . . . rather than from the perspective of those offering the debt to us.
Perhaps the only debt appropriately named is “mortgage” - its French origin “death pledge”.
Number 8... become a member of the ponzi frenzy. I've grown to hate that word 'leverage'... hopefully it dies with the boomers. I was taught the 33/33/33 rule at school for budgeting. It held true until housing costs have blown out to 40%+.. that has nothing to do with financial literacy.. just people getting screwed.
Completely separate ALL personal and SME business accounts from any investment arm, within that bank.
Then if the bankers want to play roulette on Wall St, leave them to it.
Why should their recklessness endanger a $350k term deposit (or life savings !) of an 83yo pensioner from Westport.
In NZ, they have had it too good, for too long.
Yep, IT guy you are right, as an NZ bank will keep chasing you for the debt, long after the property has been sold, so my point is why can't they afford a bank deposit insurance scheme up to AUD250k like in Australia (same banks) - or is it the case that it interferes on return on shareholders funds, per chance ?
Or the insurance companies aren't willing to take on such business ?
Either way, it's screw the little guy.
Great article. Definitely stuff that should be taught to the 50% of kids who actually turn up at school.
I think the reason so many people are financially illiterate is that they never understood why learning it is so important.. so they suffer always needing money in a hurry, they dont save enough and dont invest what they do save wisely and thua never build enough wealth to be able to stop or slow down and enjoy life.
Be interesting to compare profiles of people in middle age and retirement and how their financial choices affected their early mid and late lifestyles. Then show that to the kids as a means to get them to listen.
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