The Danger of Not Being Financially Educated And How to Fix It
vemuda.com - Being financially literate or financially educated is defined as having the ability to master and use various financial skills. Some of these skills include personal management, budgeting, and investing.
Obviously, these skills are fundamental in life. It doesn’t matter if you’re a world-class entrepreneur or an employee, you still need to get your finances right. The thing is, most people do not know what is going on with their finances.
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They don’t know how much they spend on groceries every month, how much they could save if they were more disciplined, and they hardly understand taxes.
This dangerous behaviour comes from a lack of understanding of the basic principles of money and the modern economy.
Not knowing why some things happen and how to get and save money will ruin one’s financial life.
So, our goal today is to give you some of these answers and motivate you to go deeper and create a strategy for your money, so that you can make more of it. And now let's get into it.
Understand The Fear
Why can’t people answer simple questions like “How much money are you spending on groceries every month?” or “How much are you spending every time you go out with your friends?” The thing is, we as humans have a tendency to avoid the truth if it hurts us in any way.
Here's a quick example. When you're out with your friends and you see them spending money, you also feel the urge to do the same thing, even though you know its not a good idea.
But you ignore it, and spend away anyways, totally oblivious of the budget you had. And when the time comes to account for how much you have spent, you start getting cold feet, afraid to find out how big that number is.
This fear is justified: if you calculate the percentage of your income that is being wasted on secondary needs, you’ll be staggered.
But at the end of the day, it is better to face your problems and take care of them instead of pretending they aren’t there.
So before you start creating an action plan for your finances, analyze your habits and find out where it is all going.
How Money Is Made In The Current Economy
The principles of money that are true today weren’t necessarily true centuries and even decades ago. In fact, some of them might even be false in some countries today.
That’s because these principles depend on the current economy and its state.
Why Money Goes To The Rich
Money sticks to these patterns, and it isn’t about luck. Money isn’t made by luck (except for rare cases, like the lottery). There are formulas, and if you do certain things in a certain manner, you’ll get money.
There are two main reasons why the rich get richer and the poor struggle to double their minimum wage income.
Reason No. 1 – The Rich Know How To Make It
88% of millionaires are self-made. This means that only 12% of them inherited their wealth. These millionaires have figured out how to make money, and then they do it again, and again, and again until they reach their first million, their second million, and so on.
There are many industries where you can make millions. Actually, almost any industry could potentially make you a millionaire as long as you play to win.
Initially, you will make countless mistakes, but then, eventually, you’ll figure it out, and all you’ll need to do is repeat your success, and you’ll win the money game.
This is the reason why net worth grows exponentially. It means that the curve isn’t straight. Instead, it grows faster and faster.
There’s a point in the career of successful people when they have experienced massive amounts of success, and that’s when the curve really grows quickly. That moment right there is when they have figured out the formula to success.
Reason No. 2 - Money Attracts Money And It Has Momentum Effect
Let me explain. This principle is more abstract, but you can probably relate to it. Put simply, the more money you have, the more money you make.
That’s why you see people on social media talking about the importance of “how much money you keep” over “how much money you make or spend”.
You see, it doesn’t matter if you’re making 15 grand a month: if half of that is gone in taxes and the rest is gone in lifestyle, you’re not going to experience any growth.
Have you ever saved a decent amount of money?
Maybe it was for investment, maybe a new car, or the downpayment for the purchase of a house. The point is, you probably have noticed that the more you had in the bank, the more you would actually save.
This happens because having money builds confidence and discipline. When you already have a bunch of cash waiting for you in the bank, you have generated momentum.
This is very important but remember: whenever you lose momentum, you have to generate it again, from nothing.
If you had 15 thousand dollars in the bank but you’ve spent it on a downpayment, now you’re starting all over again, from net zero.
The Market Decides Your Worth
In economics, the market is like a superior entity that you can’t go against. It is the collective opinions of the side of demand and the side of supply.
There’s a delicate balance between demand and supply, and if it isn’t met, something is wrong.
Here’s a quick example. Let’s imagine that you just started your online business, and you’re selling e-books on how to cook Italian food.
The book is a good one, but how do you decide how good it really is? In economics, everything is measured using money. So, we are going to measure the worth of your book in dollars.
But how many dollars? That’s when the market comes in. Let’s pretend that you price your ebook at $20 per copy. However, no one buys your book.
That might be an indicator that the book has been overpriced, and to get some clients you should bring the price down.
The point where you can sell the maximum amounts of books for the maximum price is the balance point between demand and supply, and that’s the real worth of your book.
In order to raise the price, you need to also raise the value of the book, which is determined by the number of problems that the book solves.
Lawyers and accountants are usually paid a lot of money because they solve very difficult problems, while a simple product like a soda can be easily replaced and doesn’t solve a big problem.
You as a human being are the same: you are paid in direct proportion to the amount and the gravity of the problems that you solve.
That’s why copywriters are usually paid a lot of money: they solve the serious problem of not being able to sell through written content.
I want you to really remember this because it could potentially save you a lot of money and time in the future, especially if you’re planning to become an entrepreneur or a freelancer.
To make more money, you need to bring more value to the table, and value is determined by the number and gravity of the problems you solve.
Where Should You Start?
Now you know the most basic principles of making money: how to reach the perfect balance between demand and supply, and how and why money moves.
But I want you to get more out of this, I want to actually help you change your financial life, so here’s exactly where you should get started.
Many try to apply fixed rules to personal finance, like the 50/20/30 rule. This rule states that 50% of your after-tax income should go to basic needs such as rent, food, and bills.
20% should go into your savings account (or paying off debt), and 30% is for you to spend on whatever you like, basically money you can enjoy. This is a great little budgeting rule, but I don’t believe everyone can apply it to their life.
There are things that are very subjective, like different countries, different states, different economies, different life situations, and so much more.
You can’t just apply that rule out of nowhere. But here’s something that might help.
Step 1 - Know What is Up
The first step is to analyze your last three months and figure out what you’ve been up to with your money.
If you have a fixed income, it’ll be easy to figure out the percentages, but you can also do that if you’re self-employed or have a business. This isn’t a quick task, it’ll take you some time.
If you can’t find information on where your money has gone in the last 90 days, then you can also analyze your next three months, and then go to step number two.
Ideally, you need to classify your spending’s into 4 categories.
- Needs (e.g. shelter, food, health)
- Wants (any secondary need that you can live without is a want)
Step 2 - Change Your Habits
Now that you know where your money has gone, you need to manage it better. Decide what percentage of your money should go where, and be as disciplined as you can with it.
Saving has to be fixed, and ideally, you also need an emergency fund for at least six months of “rainy days”.
If you don’t have an emergency fund, use the savings from the first months to build that, and then save for whatever you like.
The investing bucket is up to you: you could invest in the stock market with as little as 100 dollars a month (just to build the habit and the skills), or save money to invest in a business or real estate. It really is your choice. And that’s it.
Now, I know this might seem too simple: that’s the point. If your financial management strategy is too complicated, you won’t use it, and it will be counterproductive. Negative management of your money could even make you lose money, so keep it simple.
We at vemuda.com focus on bringing valuable content on personal finance, self-improvement, entrepreneurship, business, and so much more. You don’t want to miss out. The money is out there, all you need to do is learn how to get it.
Thank you so much for reading. With that said, have a great day you guys, and I'll see you all in the next one.