I am deadly serious when I say that if you do not have a solid grasp of what is happening in the world at the moment then it is very likely you are becoming poorer, and this process is only set to accelerate.How To Own the World, Andrew Craig, 11
Debt. Overdrafts. Inflation. These words are no stranger to everyone. In my earlier post, ‘Why I am learning about Personal Finance’, I introduced some of the reasons I wanted to learn more about money. It might not be the most fun thing to learn, but even understanding the basics principles of personal finance can make the biggest difference to your future. It will give you the ability to live a life you want without any financial setbacks. In this post, I will define what I mean by being financially literate, and why I think it is important to care about money.
What do I mean by being financially literate?
I don’t mean getting a degree in Finance or Economics. I am talking about the basics of personal finance. This includes knowing how to manage your money; the best current/savings accounts to store your money; how you can prevent going into debt and prepare for unexpected disasters; ways to grow your money.
The point is that if you want to make sure your money is in the best hands, you have to have the basic but essential knowledge about how to manage money.
About “Money doesn’t buy happiness”
Being financially secure is about having enough, but not about having limitless recourses. I define it as being debt-free, having sufficient income and assets to live a comfortable but not extravagant lifestyle, and being able to help out with your family when needed.Pete Matthew, The Meaningful Money Handbook, 6
Talking a lot about learning to manage and make money might give the impression of a money-hungry mentality. It is not my intention- nor should it be the intention of others- to learn about personal finance with the goal of getting rich quick and living a luxurious lifestyle. Being financially literate is beneficial and essential for everyone.
Unfortunately, although the saying “Money doesn’t buy happiness” holds a lot of meaning, it is not the whole truth. Although you can definitely find joy in things that do not require a transaction, money can definitely play a factor in how it affects our lives. An increase in money doesn’t necessarily an increase in happiness, but a deficit of money can significantly cause stress and inhibit happiness. It is important to learn about money in order to live a comfortable, stress-free life. In the most immaterialistic way, money can buy you freedom.
Dealing with debt
By being aware of the power that debt and inflation have in our financial lives, we can avoid getting into debt, or further debt.
the average consumer credit card debt… stands at £7,185 per UK household.Stop Saving Start investing, Jonathan Hobbs, 16, access the source here
Jonathan Hobbs claims a lot of us “create the illusion of wealth, rather than achieving sustainable wealth.” (Hobbs, 16). There are a lot of reasons- including unfortunate circumstances- why we get into debt. A lot of these reasons might be unforeseen and unintentional, but I also think that a lot of these reasons are accountable and can be avoided.
We live in a very powerful consumer-driven world. There is a plethora of shiny things that too many of us spend a lot of our lives trying to buy. Yet, as I mentioned earlier, it is important to become financially literate in order to avoid this to reach financial freedom. Namely, freedom of living without debt. It is possible to achieve this simply by learning about how to manage your money and budget.
Striving to beat inflation
In the ten years up to this book being published, interest rates in the UK have been 0.5% or lower. For almost all of those ten years, inflation has been higher than 0.5%. This means that money saved in the bank is actually losing value, thanks to the impact of inflation.The Meaningful Money Handbook, Pete Matthew, 113
Did you know that your money is losing value? Understanding the impact of inflation should be a motivation to learn about what can be done to keep up, or even outperform the rate of inflation. Knowing the value of your money in real terms (the value that accounts for inflation) is important.
If you are clever and lucky enough to have a savings account, wouldn’t you want your hard-earned money to have the same- if not better- purchasing power in the next few months/years you intend to use it? Chances are, it might not. If the average rate of inflation each year is 2%, and the average interest rate of UK savings accounts is 0.15% (Stop Saving Start investing, Jonathan Hobbs, page 16), there is an obvious problem.
Unfortunately, the dire effects of debt and inflation get worse over time if nothing is done about it. We will all be doing ourselves a favour by learning about how we can manage our own personal finances as soon as we can in