Financial literacy is an essential skill for all individuals. With the current global economy intertwined with technology, it is more important than ever for individuals to be financially literate. Financial literacy encompasses learning and understanding essential financial terminology and concepts. This article will provide an overview of important financial terms and concepts and explain how they can help you better manage your finances.
I. Introduction to Financial Literacy
Financial literacy is the knowledge and understanding of financial concepts and principles such as investments, budgeting and saving. It is a fundamental building block for making sound financial decisions and economic well-being throughout life. In South Africa, where financial exclusion and inequality are widespread, financial literacy is an important tool to empower citizens in making the right choices to create a better financial future.
The levels of financial literacy in South Africa are alarmingly low. According to the World Bank Cost of Financial Education Study, only 36% of South African adults reported that they could solve a simple financial problem. The unease and anxiety caused by the Covid-19 pandemic has only exacerbated the financial challenges faced by South African citizens. This has highlighted the need for increased financial literacy in the country.
Financial literacy in South Africa involves the ability to do the following:
- Understand basic financial concepts: Knowing, understanding and managing the basics of money, such as income, expenses, savings, and debt.
- Create and manage a budget: Keeping a budget, prioritising expenses, creating savings goals, and understanding how to stick to a budget.
- Develop financial skills and knowledge: Learn how to make the most of available financial services, understand the risks, benefits and consequences of different financial decisions.
- Build financial resilience: Develop sound financial habits, such as practising sound risk management, creating emergency savings, and learning how to make the most of available financial products and services.
Possessing the knowledge and skills to make informed financial decisions is critical in South Africa. Financial literacy can help reduce poverty and inequality by providing citizens with the knowledge, skills and confidence to make sound financial decisions and build stronger, more resilient financial futures.
II. Essential Financial Terminology & Concepts
Understanding financial terminology and concepts is the first step to making smart money decisions. Knowing which financial terms are important and taking the time to learn them will help you reach your goals faster seeing as financial literacy is one of the major keys to financial success. We have compiled some of the most essential South African financial terms and concepts to get you started.
- FICA – Financial Intelligence Centre Act: This act exists to combat money laundering and the financing of Terrorism. Whenever a transaction is done, the person responsible needs to provide proof of identify in compliance with FICA.
- EMI – Equated Monthly Instalments: These are the regular repayment instalments borrowers pay to lenders as per their agreement. They consist of the loan’s principal amount as well as interest.
- Net Worth: This is calculated by taking all of your personal assets and deducting all liabilities. It is essentially any money that has been earned or inherited that remains after deducting all debts.
Aside from these terms, there are a few concepts to take into consideration. Compound interest, liquidity, and diversification are just a few. Compound interest refers to the interest a borrower earns on the principal amount of a loan as well as any interest that has already been earned on it. Liquidity is the measure of how quickly an investment can be sold for cash. Lastly, diversification refers to spreading your investments across multiple asset classes to minimise the effects of market volatility.
III. Understanding Investment Strategies
Investment strategies can be overwhelming for those new to investments. It is important to understand the various strategies available in order to make the most of your investments.
- Do Your Research: Investigate different products and strategies, such as managed funds, stocks and bonds. Consider what kind of return you are looking for and how much risk you are willing to take.
It is essential to understand the differences between investments offered. Exchange Traded Funds (ETFs) are a great way to diversify investments, as you can buy a selection of stock with one purchase. Other investment strategies include cash funds and stock portfolios. In South-Africa, in particular, the Johannesburg Stock Exchange is a major player in the investment field.
- Evaluate Costs: Once you have decided where to invest your money, consider which fees and charges are applicable. Investment companies will usually charge exit fees, broker fees, administration fees, as well as performance fees. These fees should not be too burdensome, but it is important to compare costs of different services.
IV. Taking Steps Towards Financial Security
One of the most important steps towards financial security is taking control of your finances. This involves setting a budget, tracking expenses, saving and investing. It is important to plan your finances and understand what you earn and what you spend in order to become financially secure.
There are a variety of ways to create financial stability and security in South Africa. Some of these include:
- Saving: Setting aside a portion of your income each month to build a savings fund is an essential step towards financial security. Even a small amount saved regularly can make a huge difference in the long run.
- Investing: Wisely investing in stocks, mutual funds and bonds can help grow your wealth over time. As South Africans are often market-savvy, investing carefully can provide good returns on their investments.
- Insurance: Protecting your assets and income is a vital step towards financial security. Purchasing health, life, disability and home insurance can help lift the financial burden in case of an unexpected emergency.
Overall, you should always strive to remain financially secure. Whether you have little or a lot to start with, careful management of your wealth can help you reach your long-term financial goals.
Financial literacy is becoming increasingly important as time goes on. As people look to make better decisions about their money, they need to have a basic understanding of the essential terminology and concepts. This guide has provided you with an introduction to important topics such as budgeting, banking, savings, investments, credit, and taxes. Taking the time to learn these concepts can significantly improve your financial health, no matter your current circumstances.
Discussion about this post