Summary Of Financial Literacy
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Summary Of Financial Literacy

Do you know what the leading cause of human-related shipwrecks is? You might guess poor seamanship as I did. The leading cause is actually due to economic reasons such as: inferior construction or repair, improper loading (perhaps overloaded), and piracy. Poor seamanship is the second reason. How does a human-related shipwreck relate to financial literacy? These types of shipwrecks show what financial literacy means to personal finance. Or rather the lack of financial literacy. This is why everybody should at least educate themselves with a summary of financial literacy to avoid making their own financial lifestyle a "shipwreck."

Wikipedia defines financial literacy as "the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others." Financial literacy is synonymous with money management. Just as no ship captain wants to be remembered for running a ship aground, no person wants to have the reputation of being broke or possessing poor money management skills. Financial literacy is not an inherent knowledge or skill like eating food or going to sleep. This knowledge is attained through education and experience. Let's break it down the definition step by step:

1. Income

A sound grounding in financial literacy will help a person build a sturdy financial plan with a wide diversification of income streams. The primary source is active income like your day job and the secondary source during one's working life stage is passive income like interest and dividends. At retirement, the income stream suddenly changes and passive income becomes the primary income source. Ideally there is enough money deposited in different investment vehicles to not outlive your savings. It is not a good situation to be sailing into port and sink before you can unload your goods due to insufficient funds to keep the ship upright.

2. Money Management

But how do you save enough money for retirement? How do you manage your money to have enough for retirement? How do you make your financial ship leak-proof? For starters, consider different investment vehicles like interest-bearing savings accounts, stock/mutual fund investments, tax-deferred IRA retirement accounts, and creating a household budget.

3. Investments

I suggest talking with a financial adviser to create an appropriate investment strategy for your needs. This discussion should include an allocation between stocks and bonds (preferably more stocks if you are just starting your working life and more bonds if near retirement), how much to contribute to a retirement & non-retirement accounts each month so you will have enough money accumulated assuming a reasonable rate of return, and to review investments to make sure you are not consistently underperforming the market.

4. Charity-

It's okay to spend money. Not many of us would have a job if none of us bought anything. Automobiles and houses just don't magically appear out of thin air. With that in mind, it's also okay to spend money on somebody other than you or your family. There are lots of charitable organizations that rely on donations to provide a service to people in need. Perhaps you or a family member received help from one of these organizations at some point in time and want to return the favor so another person can enjoy the same opportunity.

As you can tell, there is more to personal finance than only paying the bills each month. It takes a good captain and crew to navigate through the storms. Even if you have the best of crews, you cannot sail across the ocean with a shoddy ship. This is what financial literacy means.


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