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What are the 5 principles of financial literacy? A complete guide from DNBC

DNBC Team DNBC Team

Jan 09, 2023

Table of Content

Financial literacy is frequently defined as the ability and understanding to manage money effectively to achieve your goals. According to the United States Financial Literacy and Education Commission, there are five principles of financial literacy. Consider ways to improve or change your habits as you go through the list below to create a healthier financial situation. Investigate DNBC Financial Group’s interactive guides for each topic.

What are the 5 principles of financial literacy? A complete guide from DNBC

What are the 5 principles of financial literacy? A complete guide from DNBC

Benefits of Financial Literacy

First of all, we need to know what benefits financial literacy can bring to you.

Overall, the advantage of financial literacy is that it empowers people to make better decisions. Financial literacy is crucial for a variety of reasons, including:

Financial literacy can help you avoid costly mistakes: Floating-rate loans may have monthly interest rates that differ, whereas traditional IRA contributions cannot be withdrawn until retirement. Financial decisions that appear to be innocuous may have long-term consequences that cost individuals money or disrupt life plans. Financially literate individuals are less likely to make mistakes with their finances.

Financial literacy prepares people for emergencies: Topics in financial literacy such as saving and emergency preparedness prepare people for the unknown. Though losing a job or incurring a large unexpected expense is always financially devastating, an individual can soften the blow by practicing financial literacy ahead of time and being prepared for emergencies.

Individuals can achieve their goals with the help of financial literacy: By having a better understanding of how to save money and budget, people may make plans that set expectations and hold them responsible for their finances. Though someone may not be able to afford a dream right now, they can always devise a strategy to improve their chances of making it a reality.

What are the 5 principles of financial literacy?

Earn: Understanding your paycheck

You must first determine your income before you can begin spending, saving, and investing. This part is simple if you make the same amount each month. Examine your paycheck carefully to determine your gross and net income, as well as any other deductions, such as employer-provided health insurance or a retirement plan.

Budget your money

In general, money is used for four purposes: spending, investing, saving, and giving away. Finding the right balance between these four categories is critical, and a budget can be a very useful tool in assisting you with this.

Get started

Thinking about and recording your short- and long-term financial goals is an important first step in creating a budget. This will help to create a baseline for mapping out and implementing concrete plans.

Many people use the following formula when budgeting: Income – Expenses = Savings. However, here is a formula to assist you to achieve financial success: Income – Savings = Expenses. Savings, in other words, should be prioritized and built into your budget plan, while expenses should be planned and paid from the remaining funds after savings have been deducted.

Income, savings goals, fixed expenses, and flexible expenses should all be included and tracked when creating a budget (needed and wanted). For a budget to be effective, all lifestyle payments and other financial elements must be considered and properly logged.

To easily control your expenses, you should use digital money transfer systems when making payments for goods or anything. With service at DNBC Financial Group, you can manage and track details of your expenses efficiently. Moreover, when you want to buy something from other countries and need to pay the supplier in foreign currency, we will give you the best exchange rate and lower transaction charges.

Borrowing

Credit and credit scores

When you borrow, a credit bureau receives certain information. Additional information, such as whether you’ve made on-time payments on your bills, whether you’ve missed any, and the total amount of debt you owe, will be shared with the credit bureau over time. These factors contribute to the calculation of your credit score, which is a number assigned to lenders that indicates your ability to repay a loan and is reported on your credit rating report.

Credit cards, personal/term loans, and lines of credit are the three main types of credit.

Whatever the type, keep in mind that all forms of credit have a cost — interest, which is usually paid monthly, and fees (the amounts lenders charge for use of their money).

Protect: Preventing fraud and purchasing insurance

Once you’ve established a reliable budget and investment strategy, it’s critical to safeguard the money you’ve earned. This includes checking your bank accounts and credit card statements regularly for errors or suspicious activity, keeping documents and passwords secure to avoid scams and identity theft, and purchasing adequate insurance to protect yourself in the event of an emergency.

Plan before investing

Identifying your short- and long-term financial goals will assist you in determining which types of investments and planning approaches may be most appropriate and effective in assisting you to save for your needs. To do so, you must first differentiate between what you truly require and what is a “nice-to-have.” This process enables you to set realistic goals that you can confidently work toward.

About DNBC Financial Group

Being an experienced financial institution in the world market for financial payments is something we are always proud of.

We offer the best services for international money transfers. Whether you have a personal account or a company account, DNBC Financial Group can help you with various payment methods.

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Note: The content in this article is for general informative purposes only. You should conduct your own research or ask for specialist advice before making any financial decisions. All information in this article is current as of the date of publication, and DNBC Financial Group reserves the right to modify, add, or remove any information. We don’t provide any express or implied representations, warranties, or guarantees regarding the accuracy, completeness, or currency of the content within this publication.