Have you ever ask other people if the house they bought or own is an asset or a liability? You will be surprised to learn that only a few people have financial literacy. Only a few know the answer – the house they own is more a liability than an asset.
Do not be surprised though if you come across other specific terms used for the word asset in business processes. It is part of becoming financially literate.
Financial literacy helps you understand the things you need to boost your personal finance. The way you handle your money and the activities that involve money are very important. Financial literacy is your key to financial freedom and success. It is your saving grace from financial doom.
Where do you start? You have to accept first that your understanding about financial matters is not enough. Assess yourself. You may want to initially ask yourself these questions:
- How does money work?
- How do I manage my income, earnings, spending and savings?
- Do I need a credit card?
- How much do I need to borrow?
- What type of investment is best for me?
- Do I have enough for my retirement someday?
- What type of insurances do I need?
Definitions from Financial Experts
Investopedia, one of the world’s leading sources of financial content on the web, describes financial literacy accurately. They say it is a means to direct your ability to manage personal finance efficiently. It is also your instrument to acquire knowledge in decision-making with regards to budgeting, investing, and retirement. Actually, these are only a few of the personal finance matters you can gain from being financially literate; there are more of them.
Robert Kiyosaki of Rich Dad believes that there are four foundations that serve as basis of financial literacy. The first one is identifying the difference between an asset and a liability. The second one is deciding on what to choose between investing on cash flow or capital gains. The third is how to use your debt and taxes to acquire wealth. The last foundation is being confident to make your own financial decisions.
Financial literacy must not focus on personal finance only, Dr. Lennette A. Coleman of Edutopia believes. For her, fluency about global economics, entrepreneurship and investing compose financial literacy. Your understanding about investment, she claims, should result to making the money you earn work hard for you.
Lucie Tedesco, a commissioner for Agency of Canada has interesting words to say about being financially literate. She has a basic definition that says in order for you to make responsible financial decisions for your financial situation; you need the knowledge, skills, and confidence. She also emphasizes the need to start early to become financially literate in the future.
Learn Some Financial Terms
Personal finance is a systematized knowledge of handling money that involves decisions and activities. It includes matters like saving and spending money, retirement, insurance, key investment, credit and loans management, etc. but not limited to them. It involves planning that starts with evaluating your financial situation, setting short and long-term goals, creating a financial plan, implementing the plan, and monitoring the plan if it needs re-evaluation and change.
Budgeting is money, finances, or resources allocated for expenditures listed for clear reckoning. It is basically a plan based on estimates like allotment of money for food, clothing needs, electricity, water consumption, etc., or on fixed expenses like house rent, house help wage, medicines, etc. Budgeting is very important for short or long-term projections.
Income, in simpler terms, is whatever money you received from the goods and services you provide. They are in the form of wage, salary, compensation, dividends, interest, profit, capital gains, rent, and much more. Most of them are taxed.
Earnings are net income but are also used sometimes as income. In business, earnings are money left after tax, or after you deduct cost and expenses. Earnings also measure the amount of profit that is why it is also called profit.
Savings is the amount of money left after spending. It is money not spent on expenditures. You can choose to deposit them in a bank, or to use in investments, or to put aside as cash. There are a lot of methods now to save money and you can use them for your personal finance.
Expenditure is the amount of money used to pay, or disburse, or spend, for goods or services. Charges made to funds are also classified as expenditures. It is synonymous to cost, expenses, payments, or spending.
Warren Buffet defines investing as “the process of laying out money now to receive more money in the future”. Investing will need you to use your money to buy something that will give you returns that are advantageous and rewarding. When you invest, you expect that you will profit in the future. You can invest in stocks, bonds, mutual funds, real estates, or business enterprises.
Robert Kiyosaki has an interesting definition – “An asset is anything that puts money in your pocket and a liability is anything that takes money out of your pocket.” According to him, the rich does not consider a house an asset because it takes money out of the pocket each month. In the business world though, a house is a depreciating asset because it loses it value after a period of time.
Picking that bit of information from Rober Kiyosaki, a liability takes money out of the pocket. A house is more a liability to him because you pay for the maintenance and the taxes. It is more an obligation or a debt that you need to pay, or that you are responsible for. Included in this category are loans, mortgages, accounts payable, etc.
Financial literacy starts from getting acquainted with the phrase, learning it by heart, and knowing more about it. If you are ignorant about terms being used in your journey towards financial literacy, start by accepting that you are financially ignorant. The secret of freedom is education, to quote an authority.
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