Due diligence is always a necessary step when making any decision in life.
In this article, nine key financial topics are expounded on to help you understand, protect and grow your finances.
Firstly, let’s look into what being financially literate means by defining financial literacy and how one can be financially literate.
It’s having a coherent understanding of financial workings and skills such as budgeting, investing, borrowing, taxation, and financial management.
To be financially literate, use available resources to provide comprehensive, expert information regarding various financial products and services for different financial situations in personal and corporate scenarios.
Some examples of such resources include financial institutions, finance and investment websites, and books, APPs, networking chat groups (online and offline), just to name a few.
With regards to the above, let’s get into nine topics you can get started on today.
Your net worth is the difference between what you own and what you owe.
If your net worth isn't what you'd want it to be, don’t let this be a discouragement. Many start at or have a negative net worth, often due to liabilities (such as credit card bills, mortgages, loans, student loans) being more than assets.
Once you've gained insight about your net worth, your next goal is to learn how to budget to increase your net worth over time - as you save money and pay off debt.
Budgeting is about learning how to be smart about your spending, making this one of the most foundational financial topics to learn.
In short, you learn how to allocate all your money by determining exactly how much you earn each month and where your money is going.
So, how do you get started?
Ideally, you’re doing well financially when your income exceeds your expenses. Therefore, always try to lower your expenses as best as possible, without downgrading your quality of life.
For instance: This doesn’t mean substituting your healthy meals for cheap processed snacks to save money. Instead, use your budget to help you switch up your diet for healthy, affordable options without compromising your quality of life.
There isn’t one right way to budget. However, you can identify and learn more about the budgeting strategy that works best for you. Here are some popular budgeting methods:-
Using this percentage budgeting option is popular but not ideal for you if you have a large debt amount.
You allocate 50% of your budget to needs such as rent, grocery shopping, and transportation, 30% toward wants like travel, dining out, to name a few, then 20% goes toward savings and debt repayment.
These are free-to-affordable, complete apps to help you plan your spending and track your expenses throughout the month.
This budgeting method works to help you determine how much you want to pay yourself each month. It helps to identify how much you want to put toward your savings and debt goals. Whatever is left is what you can spend.
The best thing about this option is you can merge this option with any other budgeting method.
Here’s how it works - have different envelopes for different purposes, like setting aside cash in an envelope for leisure, another for savings, another for your household budget, and so on. When an envelope amount is over, you’re done spending in that category for the month. If you need to top-up or deduct a budget category, do so in next month's budget.
Tip: There are free digital, complete versions of this system for download
Another financial topic to learn about is saving money, yet it's no surprise that most people simply aren't doing it.
Finance experts recommend saving at least 10% of your income. When starting off to learn about savings, it's best to understand how to save money for specific financial roles.
This way, you gradually learn about saving products and methods, including how to adapt and successfully achieve your savings goals. Here are some examples of different types of savings goals to learn about:
Like most things, there’s no magic wand to saving money - you have to do it well by making informed decisions.
Once you learn about how to manage the money you have: the next thing is learning how to make more money and what to do with the extra money.
One such way to make extra money is through investing.
Learning about investing means learning about the types of investment opportunities, their pros, and cons.
It’s important to note there isn’t a ‘perfect’ investment option for all. So, before you start investing, familiarise yourself with these investing 101 terms you’ll find mentioned in any investment topic or discussion:-
If you’ve had a loan application denied, it's likely because of a poor credit score.
Learning about what credit is and how credit works will help you understand how a credit score is like a financial CV for creditors to approve and reject credit applications.
For creditors to give you a credit card or a loan – creditors must determine your likelihood to pay back the credit, beforehand.
According to CBK, by June 2021
Kenya had approximately Kshs. 3.7 million in domestic debt and about Kshs. 4 million in external debt.
Debt is incurred at some point in life - whether it's an airtime loan, student loans, mortgage, you're on a “lipa pole pole” payment plan.
With the above statistics in mind, it's unmistakable that any national debt impacts a nation's economy. Consequently, this has a trickle-down effect that will either favour or strain your finances.
If you don’t learn how to handle debt: you can easily find yourself in a deeper financial hole. That’s why you should work towards learning and understanding the types of debt and how to handle your debt type without compromising other financial obligations.
Believe it or not, there was a time when people paid tax for wearing a wig in the 17th and 18th centuries and for one refusing to shave their beard (beard tax)!
At present, there still are some unusual tax types, nevertheless, taxes are an unavoidable obligation everyone encounters in any lawful transaction.
Fortunately, you’re not expected to be a tax expert but it is important to understand how much you pay in taxes. A good accountant, automated tax software, or access to KRA can help you figure out all things tax-related.
Remember, if you’re earning money, you’re also paying taxes and most tax deductions are done before you see the money you've earned.
Financial services are more accessible online, which increases the risk of fraud attacks, unlike traditional centralised finance services that are nearly impossible to breach.
In today's digital world, hacking is a prevalent issue, and unfortunately, this issue evolves as technology advances. It has led to online business or trading, banking, tracking, and investment platforms that require your personal information riskier.
You can’t do anything about being a target for hackers, but you can avoid being a victim.
By learning what you should do to safeguard your money: you learn how to secure your financial accounts.
How To Avoid Fraud Traps
Here are some steps you can take now: activate a two-step authentication code and biometric or backup options and set unique, strong passwords for each account.
Additionally, protect your online activity by using a VPN: an encryption software you install on any smart device to intercept hackers from accessing your information when online.
Note that insurance is an additional safety net to help you out during an emergency. Learn about how to go about acquiring insurance on public (NHIF) and private platforms.
In a nutshell, buying insurance is a way of managing risks against the payment of losses.
As you continue learning about insurance, you’ll quickly note the various types of insurance and insurance providers, so where should you start?
According to most financial experts, it's advisable to start by learning about four types of insurance we all should have (where applicable): health insurance, auto insurance, life insurance, and long-term disability (short-term and long-term).
If the temptation to skip this overlooked yet important topic creeps in - remember if there’s ever an emergency, you’ll be glad you know about it and hopefully have insurance.
There’s no shame in not knowing, but it is your responsibility to take charge and learn about the above topics and how they affect your financial future.
It’s not too late. Get started and enjoy the learning process.