You are probably thinking that this is not an article for you, but take a second and answer the following questions: Are you an aspiring entrepreneur (do you plan of having a business one day)? Do you wish to know how you can effectively spend your salary, allowance, or stipend? If you answered yes to any of the above questions, then this article is for you.
Financial Literacy is defined as “the ability to read, analyze, manage, and communicate about the personal financial conditions that affect material well-being” (Vitt et al. as cited in Cude et al., 2006) . This enables one to be able to make informed financial choices, discuss money and financial issues without discomfort, and plan for the future. Many people think that understanding how finances work is for people who specialize in business, however looking at the definition above one would note that everyone who makes/earns money is affected by the decisions they make. It is not just about how much money we make, but how we use the money that we have that differentiates the rich from the poor (Ferry, 2017).
One very important subject under financial literacy is budgeting which basically means planned and effective use of money. The reason why you will find people who earn the same amount of money and live in the same country but have different lifestyles is the differences in their budgeting strategies. Good budgeting skills involve knowing how much one earns, what one wants to spend the money on and whether or not that amount is enough for it. If the amount available is enough, one should set their priorities based on what is very important and urgent. This ensures that the person does not go bankrupt or have an unbearable debt bill.
Debt Management is yet another crucial subject under financial illiteracy. Debt Management involves effective plan to pay back what one owes to other parties and the ability to minimize buying on credit and borrowing too much. Borrowing may be beneficial but when one overdoes it to the extent that the amount of debt is more than twice the one’s earnings then there is a very high probability that you will not be able to pay what you owe. This may lead to creditors recruiting debt collectors to take away even valuables that one owns. This takes us back to the issue of budgeting; if you plan the use of money you will be able to avoid delays in settling debts or even borrowing at all.
The reasons that can make one to be spending more than they can afford include lack of understanding basic financial terms like debt, interest, profit or loss and financial statements like Income Statements, Cash Flow, and Balance Sheet. Debt refers to the financial obligation which reduces one’s total revenue; debt includes loans, credit buying etc. Interest can be either on debt or savings. In case of savings, interest is a mark-up income to the amount that is deposited with a bank over a certain period of time. Interest on debt is a mark-up to the amount owed to other persons. Interest on debt reduces income whereas interest on savings increases income. Consequently, it is advisable to invest your money with a bank and make sure to pay all debts on time before the interest becomes too huge. Financial statements like the Cash Flow can help one understand how much money he/she has before overspending the little that is available.
In this century where information is power, it is important to have a basic understanding of how the financial system works. Otherwise those who have the understanding might take advantage of your financial illiteracy to rob you. As college students it is important to start making informed decisions now because we are the next business owners, social entrepreneurs, managers etc. Thus, if we do not have the skill to effectively and efficiently use our financial resources it might be difficult to meet our goals. Understanding Financial Literacy and openly discussing issues concerning financial resources and economy is pivotal for success. In this new month of November before you incur a debt, ask yourself if it is necessary.
Story By Judith Dembaremba.
References
Cude, B. J., Lawrence, F. C., Lyons, A. C., Metzger, K., LeJeune, E., Marks, L., & Machtmes, K. (2006). College Students and Financial Literacy: What They Know and What We Need to Learn. Eastern Family Economics and Resource Management Association. Retrieved from https://www.cgsnet.org/ckfinder/userfiles/files/College_Students_and_Financial_Literacy.pdf
Ferry, T. (2017). How to Properly Manage Your Money Like the Rich[YouTube video]. Tom Ferry International. Retrieved from https://www.youtube.com/watch?v=wJB90G- tsgo&t=924s
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