Appendix – Financial Literacy
The term "personal finance" refers to the management of finance, which covers many processes like budgeting, estate planning, record keeping, and managing, saving, and investing your money. We often use the term to refer to the entire industry which provides financial services and advice to people about financial and investment management.
To the MMEX team, helping users manage their personal finance is about helping the users reach their financial goals, like planning for retirement, saving for a house, or paying for college.
Read more about what personal finance is.
According the Practical Financial Tips, personal financial planning can be broken down to five phases:
- assessing finance
- setting financial goals
- creating a financial plan
- executing the financial plan
- monitoring and reassessing the financial plan
You can assess your current financial condition by analysing your financial balance sheets and income statements. Review data on the values of your assets like bank savings, automobiles, and investments, and liabilities like loans, debt, and mortgages. You can use MMEX to track and analyze your finance like incomes, expenses, investments, and assets.
There are three categories of financial goals: short, medium, and long-term goals. Setting realistic and achievable financial goals help you set a direction when planning your finance.
You must have a financial plan to reach your financial goals. Create a detailed financial plan with steps listed for achieving your goals. Some examples of these steps may include investment, reducing expenses from dinning out, or getting a side job.
Once you have a plan, you must start taking actions to achieve your goals. You can follow your financial plan at your own pace. The important thing is that you actually start executing it.
Your financial plan might change as time progress. You might develop different needs and wants, like starting a family or attending post-graduate school. So, you should always monitor and readjust your financial goals from time to time.
Read more about the five personal financial planning phases.
MMEX was first developed to help people with little knowledge of financial planning and management to start managing their personal finances quickly and effortlessly. Financial literacy is important and is becoming increasingly more so today.
Investopedia is a website that aims to simplify complex financial information and decisions to help readers manage their finance. According to Investopedia, financial literacy refers to the ability to understand and effectively use different financial skills and concept to manage personal finance, budget, and invest. People who are financially literate are less vulnerable to monetary loss from financial frauds. Building a strong foundation of financial literacy also helps you reach certain life goals surrounding finances.
Read more about what financial literacy is.
Building a strong foundation of financial literacy is more important today than ever because many countries are moving away from using cash as their main payment method. It is also easier for someone to pile up debt and exceed the limit of your credit. If you do not have proper knowledge of how to manage your personal finance, you can get into trouble very easily.
The Royal Bank of Canada Wealth Management Services published an article on the six financial literacy principles to help young people build great financial management skills. These six principles are:
- budgeting
- understanding taxes
- borrowing
- planning before investing
- investing
- preparing your estate
There are four main uses for money:
- spending
- investing
- saving
- giving away
Creating a budget can help you find a balance among these four categories, and you should prioritize "saving", and plan for expenses only after factoring savings into your budget plan. Consider setting aside an amount of your savings regularly to deposit into a savings plan.
There are four main sources of income:
- employment
- investments
- inheritance
- unexpected (like a lottery win)
These sources may be taxed in different ways and at different levels, depending in the country you are based or are generating income in. You should consider tax when managing your finance because failing to do so might lead to negative consequences. We recommend that you consult with a qualified tax advisor to make sure you are appropriately accounting your circumstances and needs.
Credit refers to a form of borrowing that allows you to get something with the promise of repaying it in the future. When you borrow money, you share some information with a credit bureau, like if you have missed payments or how much outstanding debt you have. These information are used by the credit bureau to calculate a "credit score", which is a number that indicates if you can pay your bills on time. To maintain a good credit score, make sure you pay your bills on time.
There are three main types of credit: credit cards, personal or term loans, and line of credit. Be wary when you borrow money because all forms of credit come with a cost as most lenders charge you for borrowing their money.
Identify your financial goals to help decide what types of investments and planning approaches may help you save for your needs in the more effective way. Try to figure out your needs and wants to set realistic goals you can achieve.
There are two main types of investment accounts: Registered and Non-Registered, and they both have different implications for investors.
Registered accounts are accounts that are you register with the government for income tax purposes and tax-deferral opportunities.
Non-registered accounts are accounts that you do not register with the federal government. They do not have limits, and you must include earn income as taxable income every year.
When you invest, there is a notion of risk and return. A higher potential return means there are more risks. For most investments, there is no guarantee that you would receive any return.
Planning your estate means creating a detailed plan with tasks and decisions for how people would manage all your properties during your lifetime and after your death. When you have an estate plan and a Will, you can make sure that people would carry out your wishes and manage your assets accordingly.
Read more about these six financial literacy principles.