Financial Literacy 101: The Essential Guide to Personal Finance
Welcome to this essential guide on personal finance where we’ll be addressing various topics under financial literacy!
If you’ve just entered the world of adulting, you’re most likely excited about a lot of things, such as establishing your career and achieving all your life goals.
But along with all this adulting freedom comes the not-so-exciting part: budgeting, managing income, paying off debt, prioritising needs over wants, and more.
Top this with other financial considerations, such as insurance, investing, banking, etc.
We know this can be a lot on your plate, but good thing, you’re in the right place. At the end of this article, we sure hope you’re more financially literate than when you started.
What is Financial Literacy and Why Is It Important
If you take a look at these definitions of financial literacy, you’ll immediately get a grasp of its importance.
In particular, we like this definition taken from The President’s Advisory Council on Financial Literacy (U.S.A). According to the Council, financial literacy is “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.”
Another definition from the Government Accounting Office states that financial literacy “includes the ability to understand financial choices, plan for the future, spend wisely, and manage the challenges associated with life events such as a job loss, savings for retirement, or paying for a child’s education.”
Given the definitions above, we can conclude that first, financial literacy isn’t merely knowledge to be acquired but something that is used to achieve a goal, namely, financial well-being.
And second, it isn’t just for the money-savvy! Nor is it merely about making more money. Rather, it’s the knowledge that embraces the following fundamentals:
- Growing money
- Saving money
- Investing money
- Spending money
- Managing money
- Protecting wealth and assets and so on
Now, what’ll likely happen if you do well in these? You’ll be able to:
1. Avoid debt
One sign of effective application of financial literacy is being debt-free.
But just to balance things, just because you have an outstanding debt (life can get crazy, after all) doesn’t automatically mean that you’re bad at managing your money.
But generally, if you’ve learned to budget your money properly, control spending, and so on, you’ll most likely avoid incurring debts from loans, credit card use, among others.
2. Attain financial stability
For us, financial stability means you have a steady source of income. And, you’re prepared as much as possible for calamitous incidents that can throw you off financially.
3. Prepare for retirement
Remember our second definition for financial literacy? It includes the ability to plan for the future—the life you’re going to be in later on.
Picture yourself retiring. How would you like to spend your retirement? At what age would you wish to retire? Being financially literate would help you achieve your retirement goals.
4. Build a better future for your kids
If you’re a parent or planning to be one, your financial well-being will definitely affect their future, for better or worse. Thus, being financially literate becomes an even bigger responsibility.
5. Enjoy life
You wouldn’t be able to enjoy life if you’re buried in debt or are worrying about how to pay for your rent, medical expenses, your child’s education, etc.
So to avoid that, get started on learning how to better manage your money, grow your savings, increase income through investments—things we’ll be covering later on!
Remember, with financial well being comes less stress and more peace of mind.
Moving on, this section will tackle the basics you’ll need to learn about finances to help you start your journey on the path to financial literacy!
1. Setting up a Bank Account
Nowadays, it’s almost no longer an option to simply store your money in a piggy bank at home. For example, you’ll need a bank account to receive your paycheck or even purchase or rent a house.
And while it could be a slight hassle to personally visit a bank to apply for an account, doing so will afford you the following benefits:
Within a bank, your hard-earned money is secure from disasters like fires and floods as well as from crooks.
However, this doesn’t mean that storing your money in a bank is a foolproof means of securing it with the rise of phishing and other scams.
However, the chances of falling prey to such scams is very minimal, provided that you update yourself on the current tactics of criminals out there.
Having a bank account allows you the option of banking online.
With an online account, you’ll be able to enjoy the convenience of transferring money to another account, paying for utilities, shopping online, and many more—all via your mobile phone.
But then again, make sure you’re aware and alert of the various scams present today to avoid potentially losing your money.
3. Easier recordkeeping
Having a bank account makes it easier to know exactly how much money you have. If you have an online account, you can simply log into your bank’s app and check.
And for those who don’t, you can still view how much money you have by checking your balance via an automated teller machine (ATM).
Moreover, it’ll be easier to track the payments you’ve made online as you’ll be provided with a record of it. Not only can you use these records to accurately track your spending, but these serve as proof of payments.
How do I set up a bank account?
First, you’ll have to choose a bank. Some of the things you need to consider in your selection include:
• Location – For your convenience, you may want to choose a bank that’s relatively near your place.
• Number of branches – Again, this pertains to convenience.
A bank with multiple branches (especially ATMs) across Ireland or your particular county will make it easier for you to raise your concerns (if you need to), deposit or withdraw cash, and so on.
• Digital features – Because you’ll most likely use online banking, it’d be a good idea to check out the bank’s app, its features, what it can and can’t do, its security measures, and so on.
Once you’ve chosen your preferred bank, you’ll need to prepare some necessary documents to be able to apply. According to the CCPC, these are:
• Proof of identity
This could be your driver’s license, passport, or EU National Identity card.
• Proof of address
This could be your utility bill, statement, or local authority document. Note that you cannot use your proof of identity for your proof of address. A separate document is necessary.
As always, check the website of your bank of choice to know their specific requirements.
You can also apply online, although you will most likely still need to provide your documents in hard copy either in person or by post.
Meanwhile, there are different types of bank accounts to avail of. One of the most common is a savings account, also known as a deposit account.
Not all savings accounts are alike, however. For one, this type of account offered by banks differs in its interest rates, among other things.
You can check this list to help elevate your know-how on the best savings accounts to avail in the country.
Also, if you’re short on money, the good news is there’s an account for you! With a basic bank account, you won’t be charged for everyday banking or maintenance fees during your first year, according to Citizens Information.
What’s more, you can be eligible for free banking for up to 5 years if the money that goes into your account is below minimum wage. (Hopefully, that doesn’t happen to you, though!)
2. Emergency Funds
From the name itself, emergency funds are savings kept for emergency situations, such as accidents, sickness, death, natural disasters, sudden job loss, and so on.
Of course, nobody would want to go through any of those nasty things, but knowing you have money saved up for these events provides that added peace of mind.
On the flip side, the absence of an emergency fund can really wreck your finances. You may end up with a huge debt from other people, loans, etc.
Or, you may have to draw that needed cash from the money you’ve allotted for other needs, such as a mortgage, medical treatments, car, child’s education, and so on.
Ideally, your emergency fund should be able to fund the amount you’ll need to live (e.g. food, utilities, medical expenses, etc.) for 3 to 6 months.
We know in reality saving can be tough, but try to save as much as you can, and do this consistently. A couple of ways you can save money include:
- Adopting a more eco-friendly and frugal lifestyle
- Making your own coffee instead of buying outside
- Unsubscribing to unused or rarely-used entertainment services
- Being creative with leftover food
- Limiting eating out
Although this quote pertains to retirement, we like this idea by CNBC: “The time to get started saving was yesterday.”
3. Debit vs. Credit Cards
Think of debit cards as the hand that allows you to utilise the money you have in the bank. A debit card allows you to withdraw cash from an ATM as well as make cashless payments be it for shopping, dining, and such.
It is directly linked to the amount of money stashed away in your account. This means every payment and withdrawal you make via your debit card is deducted from the total amount of money you have in your account.
On the other hand, credit cards allow you to borrow money for purchases. Banks usually offer credit cards, although there are other institutions that also offer them.
But take note of that word: borrow. This means you have a responsibility to pay for all that you’ve purchased upon receipt of your credit card statement.
Further, if you fail to pay your balance on time, expect to be charged with interest.
You might have heard all the bad rap that credit cards have been associated with, one of which is its tendency to tempt cardholders to overspend.
But at the end of the day, it can be a useful tool to manage your finances just like a debit card. Below are a couple of pros and cons as regards both types of cards:
- Allows cashless transactions
- Enables holder to withdraw cash from different places
- May offer reward programmes
- If lost/stolen, money in bank can still be protected
- Has daily purchase and withdrawal limits
- Need to pay a fee if withdrawing from a different ATM
- May need to pay a fee if card is stolen, lost, or damaged
- Allows holder to “buy now, pay later”
- Allows cashless transactions
- Has reward programmes
- Can build credit history and improve credit score (if used responsibly)
- Interest rates are usually higher than other loans
- Can tempt cardholders to overspend
- Small debts can turn to bigger amounts because of interest
You probably already know that investment is a popular term in the financial world. To put it simply, investing is a way of growing your money.
We like how Annuity.org puts it: “When you invest, you buy assets that you expect to increase in value over time, which can grow your amount of money.”
Thus, you’re spending your money on something that will yield a bigger amount over time than the amount initially spent.
Aside from purchasing stocks, bonds, and so on (more on that later), purchasing real estate to rent it out or even sell it at a higher price is a form of investment.
When you spend money to establish a business—an endeavour that generates income—that’s an investment. Even spending money to finish a degree or course for you to land a job and earn income is a form of investment.
The Importance of Investing
You may be thinking, “Well, can’t I just save?” While you should have money tucked away for savings, without investing it, you’ll be missing out on plenty of opportunities to put it to work and grow.
Furthermore, with investing, you’d:
1. Be less dependent on your current job
Of course, our jobs are our main source of income, and consequently, our savings. However, if you’ve got another money source (e.g. business) then you’ll be better prepared for an unexpected job loss or career change, etc.
2. Beat inflation
You may have €50,000 in savings, but that amount will have lesser buying power as the years go by due to inflation. Inflation is an inevitable phenomenon, so one way to go against its negative impact is to grow your savings.
3. Be able to achieve your financial goals faster
Whether it’s retiring as early as 45 or building your dream home, investing will help you achieve that faster compared to just relying solely on your income.
4. Be encouraged to save
It’s impossible to invest an amount you don’t have, of course. Thus, planning to invest could be a great motivation for you to be wiser in your spending habits to save up for whatever investment you have in mind.
5. Increase learning
Remember our first definition for financial literacy: “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.”
With investing comes new knowledge and skills. It’ll widen your perspective of how money works on a larger scale in our world, allowing you to become more—you guessed it—financially literate!
How To Get Started With Investing
First things first: build your emergency fund. Before you get all excited with the prospect of growing your money, prioritise having a safety net.
And if you have any outstanding debts, prioritise that also.
This is because aside from not knowing when we’ll face unfortunate events, investment entails a certain amount of risk. This means your investment may or may not pay off in the end.
But don’t worry, though. The amount of risk depends on the type of investment; some may be riskier than others.
If this concerns you, talking to the pros such as financial advisors is a great way to kickstart your investment journey. Financial advisors can help you navigate the world of investment, guide you in your financial goals, plan for retirement, and such.
Next, you’ll need to get familiar with the variety of investment options out there, which leads us to our next topic.
Common investment vehicles
An investment vehicle is a product that individuals invest in with the purpose of gaining a profit or return. Common types include:
Forbes Advisor defines stocks as “units of ownership in a company, also known as shares of stocks or equities.”
Companies sell stocks to obtain money. Individuals who purchase these stocks become shareholders of that company, meaning, they now own a part of it.
So, how do you now make money by being a shareholder? Stocks can change in value. So if the value of yours increases, you can opt to sell this and earn a profit.
Shareholders can also earn payments known as dividends, wherein you get paid per share of stock. However, this would depend on the type of stock, since not all stocks pay dividends.
You’ll need to set up a brokerage account in order to buy stocks. A brokerage can be funded to purchase stocks, bonds, mutual funds, and so on.
You can take a look at this list of Dublin’s best stockbrokers to help you get started on your first brokerage account.
NerdWallet has a pretty straightforward definition of a bond. According to them, “a bond is loan from an investor to a borrower such as a company or government.”
Thus, the investor (bondholder) becomes a lender or the borrower (bond issuer).
The investor earns money from this setup through interest. This is referred to as coupon rate and is provided regularly by the bond issuer to the bondholder.
Of course, the bond issuer will also have to pay back the full amount of the bond after a certain number of years. This is known as the maturity date.
For instance, if a bond has a 15-year maturity, it has to be paid back in full at the end of 15 years.
3. Mutual funds
According to Investopedia, a mutual fund “is both an investment and a company.” This type of company purchases securities in other companies using money pooled from multiple investors.
Mutual funds are “mutual” in the sense that each investor shares in the gains and losses of the fund’s portfolio.
One advantage of investing in mutual funds is diversification. Meaning, because your money is invested in different companies, you won’t be hit as hard if one of those companies has a poor performance.
A loan is a debt you incur when you borrow money from an institution like a bank. Aside from paying back the money you owe, loans typically come with interest and other fees.
Loans are useful financial products when used for the right purposes. Some of its primary uses include:
- Financial backup for emergencies (accidents, home repairs, medical treatments, funeral expenses, etc.)
- Debt consolidation
Personal loans are one of the most common types of loans. You can avail of this to fund holidays, weddings, vehicles, and more.
Meanwhile, another type of loan is a mortgage. Individuals apply for a mortgage when they want to purchase a house or other real estate without having to pay for the property’s full amount in one payment.
To find a suitable lender, contacting a mortgage broker can help you in the process. If interested, you can check out our picks for the best mortgage brokers that you can find in Dublin and Cork.
Particularly, if cars are what you’re after, there are plenty of companies that offer car financing in Ireland.
One of the main things you’ll need to consider when obtaining a loan is its APR or annual percentage rate.
More than a loan’s interest, looking at its APR will help you better compare loans since APR includes other fees (e.g. origination fees) along with interest.
In other words, just because a loan has a smaller interest rate compared to another one doesn’t necessarily mean it’s the best option for you right away.
Financial Tips for Beginners
Before we end this article, read the following financial tips on matters we have not yet covered earlier.
1. Create a budget
Ugh, here we go. It’s budgeting time. While it may not be the most enjoyable task for some, believe us, it’s one of the most vital.
Budgeting is essentially deciding how the money in your hands will be used up. So, it’ll affect everything—from staying out of debt to saving up for your retirement.
While people will allocate their money differently since we all have different needs and sources of income, you can try following the 50/30/20 rule.
In this rule, you apportion 50% of your income—make sure tax has already been deducted—to your needs, mainly, your living expenses.
The 30% of your income will be for your wants, while the remaining 20% will be for your savings and debts.
2. Control spending
Even if you’ve come up with the best budgeting system for your lifestyle, it won’t be that effective if you don’t control your spending.
Self-control is an age-old but effective weapon against overspending, impulsive buying, and so on.
Just because an item’s on sale doesn’t mean you should buy it right away. Or, that you may be missing out on something if you don’t buy it.
You can also try minimising temptations by turning off the notifications for your online shopping apps. You can even try listing down potential consequences if you go beyond your budget.
Furthermore, try tracking your spending habits to give you a bigger picture of where your income goes.
3. Set financial goals
Having a goal will direct your spending, budgeting, saving, and so on. At the start, this should be for an emergency fund, pay off debts, and save up for future investments.
Of course, other goals will include having your own house or car by a certain year, going abroad for vacation, retiring by this age, and such.
But more than setting financial goals, you’ll need to be intentional about it. Just like with any other goal, being intentional means you consciously take actions that take you a step closer to that goal.
And vice-versa, you do not, as much as possible, do things that’ll hinder you from achieving that goal.
As mentioned earlier, financial advisors are professionals that can help guide you in establishing and achieving your goals.
4. Consider getting insurance
Insurance is a way to protect your hard-earned money. When you obtain an insurance policy, you pay your insurer a particular amount regularly.
Similar to an emergency fund, this money given to your insurer (known as the premium) along with other policyholders can aid you in unfortunate events like sudden death, accidents, and so on.
And if you experience such an event, and it happens to be covered by your insurance policy, you are then entitled to make a claim and so recover financially.
Insurance policies differ in terms of coverage. There are health insurance, car and motorcycle insurance, home insurance, life insurance, business insurance, to name some.
Also, you have to understand that each type of insurance also has its own degree of coverage. For instance, for car insurance, you can opt to get (or not) coverage for fire and theft, roadside assistance, among other protections.
5. Be on the lookout for scams
If it’s too good to be true, it most probably is.
Any endeavour that promises easy money or big returns in a short span of time and so on can be tempting. However, it’s best to avoid such offers that come your way.
Be careful where you invest your money. Seek advice from the right people; don’t stop with this article and continue learning!
6. Take good care of your health
Sometimes (or most of the time) health is an asset that’s often overlooked when it comes to achieving financial well-being.
At the start of your journey to financial success, you’re most likely a young adult who’s full of vigour and excitement—someone who’s ready to hustle.
If not careful, this can sometimes lead to building unhealthy habits like overworking, sleeping less than needed, eating too much takeout, etc.
Having a chronic illness later on in life is a sure money drainer. Thus, to ensure you enjoy your retirement, try to have a good work-life balance as much as possible.
Take breaks as needed. Take good care of both your physical and mental health by scheduling appointments with your doctors, psychiatrists, psychologists, dentists and other healthcare professionals as relevant.
And there you have it! Our essential guide to personal finance ends here for now. Learning never ends, so make sure you enrich your financial know-how with more resources on this topic.
If you’ve got something to add to this article, feel free to contact us anytime to let us know!