Equipping yourself with financial literacy helps you to make money decisions easier. It’s important to have an understanding of the basic principles and then make it a priority to increase your financial literacy. People who are smart with money are always working on increasing their financial knowledge. Remember that nobody cares more about your money than you do. If money is one of the crucial elements to helping you build the life that you want, getting better at managing money should be one of your priorities.
Here is a start:
1. The Basics of Budgeting
Budgeting is the process of maximising your income and a crucial part of financial literacy. Budget entails becoming conscious of how you are deciding to spend your money. A lot of people get to the end of the month and wonder where their money went, as if they have no idea what happened. Budgeting ahead means you get to start the month knowing what’s going to happen to leave you in control of where your money is going.
When planning your budget, take into account the income that you actually receive every month. You want to create a budget based on regular or average monthly income. Have a separate way of dealing with your irregular income like commissions, bonus or allowances. This way, you’ll able to allocate money to all the important activities or expenditures without relying on a variable or irregular income.
The things that are often missed out of a budget are:
- Travel – many people use their savings for travel. For most of us, travel is part of our expenses, whether we do it once a year or frequently. Allocating funds for travel means you can leave your savings account for other future goals.
- Miscellaneous expenditures – expenses that come out every month on bit and bobs, this and that. It might relate with repairs or unexpected expenses on the car, the house, or other allowances. There is always something unexpected every month. Allocate an amount for these expenses. Also, keep the miscellaneous fund separate from your emergency fund. An emergency fund should be something that is not that frequently used, perhaps for medical emergencies or fortuitous events. More importantly, an emergency fund is a liquid asset in the bank that makes you feel secure, that in the event something unexpected happened, you are assured that you have a certain amount that can keep you for a while.
- Gifts – Birthdays, weddings, births, festivities and other celebrations. Let’s face it: life’s celebrations are one of the very few things that you will remember in the end. Work out how much you spend on the average over a year and allocate a monthly amount to it. Include gifts to yourself too!
It is also helpful to create separate bank accounts or even envelopes for each of these categories. Think of it as a financial filing system.
2. Understanding Interest Rates
An interest rate is the cost of borrowing or holding money. A bank would pay you a rate of interest on money you hold with them. Even though that money might be sitting in a current account or savings account, it is money that the bank has access to use as a business. Holding your funds in a bank will offer you a rate of interest based on how much you have. Usually, the longer you leave your money with the bank, the higher the rate of interest you are given. A bank account will have a much lower interest rate than a 12-month deposit account. Interest is usually paid back into your account.
You will also pay a rate of interest on the money that you borrow. The interest rates are set by banking and lending institutions, as regulated by the national government. The interest rate could be different depending on the purpose and stipulated period of the loan.
It’s important to know how interest is calculated, especially on debt, for you to know the total or accumulated money that you need to pay back.
3. Prioritising Saving
‘Pay yourself first’ is a phrase commonly used by the most successful and wealthiest people on the planet. It means to consider your savings your most prioritised expense. If you think about it, it actually is another expense, but just one that needs to be paid in the future. By paying yourself first, you are simply being smart by prioritising what usually are your most important expenses.
To do this easily, you need to focus on your goals and why they are important to you. Often, we forget why things are important to us, and so we need reminding. This emotional charge will keep you committed to keeping saving and keeping it as your first expense.
It’s also important to break different saving accounts or investment accounts down based on your timeframe when you will need that money.
4. Credit-Debt Cycle Traps
This usually comes down to my first point on how effectively you have budgeted. When you miss out budgeting for expenses that don’t come out monthly, it leads to not having enough money to cover it and so out comes the credit cards. You hope to pay it back next month, but by then there is another expense you need to account for. If you are not able to repay your credit card in full for two consecutive months, then you need to go back to your spending and cut back. It usually means you are spending more than you earn.
Credit cards are often sold by highlighting the interest at between 2 - 4%, but this is the interest rate on a monthly period. Computed on an annual basis, the average interest rate of a credit card in the UAE is 37.5%.
If you are reconsolidating debts, ensure that you commit only to a monthly repayment that is actually affordable. Often, reconsolidation loans are taken out when financially-stressed, and it is easy to fall into the debt trap. Do your numbers before going to the bank and only commit to what’s affordable to pay back.
We hope these tips will help you to develop better financial literacy and enable you to have a better relationship with money. Financial literacy is about understanding how to make your money work for you.
About the Author
RASHEDA KHATUN KHAN
Wellness & Wealth Influencer, Motivational Speaker & Presenter with over 15 years’ experience working with businesses and individuals as a financial advisor in corporate banking, leadership and personal development trainer, a debt panellist for The National and a Kinesiology Practitioner, Rasheda is known to many as a wellness & wealth inspiration. Thousands have benefited from her work to empower people with the education, tools and resources needed to live a healthy and wealthy & meaningful life. She has hosted and spoken at a number of events and corporate training functions in the UAE, Qatar, UK, Pakistan, Bangladesh, India and Singapore. These particular experiences have given her expertise in business, financial and wellness empowerment.
In the midst of her success and to everyone’s total surprise, in 2006 26-year-old Rasheda learnt that she was riddled with cancer from her diaphragm to the top of her skull - chances of survival were slim. Ever since then, Rasheda has avidly worked to live a better and richer life and to teach others the life-changing lessons she only realised herself after being diagnosed with cancer.
Rasheda is a lover of life, a visionary full of passion, an educator and a philanthropist at heart.