Financial literacy: what it is and why we need it. How to boost your financial literacy?

Financial literacy is the knowledge about finances, understanding how to manage them, and the mindset that helps you make correct decisions about your money. It will not make you rich automatically, but it will help you improve your general well-being. These days it is crucial to be financially literate, and we must start learning it from childhood.

What you need for correct money distribution

There are three main approaches:

1. Keep a monthly budget. It is necessary to spend less than you earn. Your budget must include all the expenses: regular(utility bills, rent, loans, etc.) and variables (food, entertainment, rest, re-decoration, etc).
2. Make a “safety fund”. This must be the amount equal to at least 3-6 of your monthly salary, on average – your yearly income. If you have children, your fund must take that into account, too. This money will help you stay afloat if you are out of work or face unexpected major expenses.
3. Invest in the future. Invest your money into things that will let you earn more. For example, if you work in the sphere of cargo transportation, it makes sense to spend some money on a more modern or bigger vehicle that will allow you to increase your income in the long term.

How to assess your financial literacy?

Try answering the following questions. The more times you answer “yes”, the better your financial literacy is.

1. Do you have a monthly budget?
2. Are you working on decreasing the amount of your loans (patēriņa kredīts) and debts?
3. Do you know your credit score?
4. Do you know how much you spend in 3 months?
5. Do you have any savings in case of an emergency?
6. Do you know how to earn money by depositing?
7. Do you know the difference between different kinds of financial insurance?
8. Do you use tax refunds if such are available?
9. Do you pay your bills on time?
10. Do you know the difference between investment and insurance?

How to boost your financial literacy

Impulsive buying is the main problem for the majority of people. Here are several tips on how to spend your money smartly:

• Hold the thing you want to buy for at least a minute and only then make a decision. As a rule, this trick helps to avoid unnecessary spending;
• Pass a mental “stranger test”. Imagine a person standing in front of you; in one hand they hold the thing you want to buy and you can have it for free. On the other hand, the person has the money that you’d spend buying it. What would you choose? If “money” is your answer, you don’t need that thing.
• Don’t take credit cards when you go shopping as it may give us the impression of spending someone else’s money. But you’ll pay back with your own money, won’t you? For this reason, it is better to have a debit card or cash.
• Compare money to your working time. In doubt about whether to buy anything? Count how many hours you would have to spend working to afford this thing. Such an approach often gives us a reality check and saves us from unnecessary expenses.

In cases when you really need to buy something but don’t have the full amount, you can always apply to Incredit and get a loan for legal bodies under favorable terms.