With knowledge and information, you can make better decisions – this is true for all things in life, money included. Your financial wellness depends on your understanding of money.

Most of us believe that our money troubles would be over if we earned a better salary, won the lottery, or married a rich man or woman. Sadly, that is not true. The thing that will help solve money problems is to make better money decisions, and you can only do that when you understand money better and use that knowledge to change your money habits. This is called financial literacy.

What is financial literacy?
In simple terms, it is knowing how to manage your personal finances, specifically when it comes to debt, savings, budgeting, and investments. When you understand each of these elements and use that knowledge to inform your money decisions, you are on your way to financial wellness.

Let us take a quick look at all four.

Debt is money you spend that isn’t yours. It can be a loan or a credit card. Good debt is money you borrow with which to improve your life, such as buying a house, getting an education, or starting a business. Bad debt is when you borrow to buy things you either don’t really need, such as more clothes, or when you borrow to get through the month. The latter is the quickest way to get yourself into a debt trap, where you have to keep borrowing to pay off last month’s loan. Your single biggest financial goal should be to clear debt and to live debt-free as far as possible.

Here’s what you must understand about debt management before you take out a loan:

• How does interest work?
• What is the total cost of the loan?
• Can you afford the total cost of the loan?
• What will happen if you miss an instalment?
• Do you understand the loan agreement?

Savings is money you put aside every month. Your first savings goal is to build up an emergency fund so that you don’t have to go into debt if something unforeseen happens. With your emergency fund in place, you can start saving for specific goals, such as a family holiday, home renovations, clothes for the new season, tyres for your car.

Here’s what you must understand about saving:

• Don’t wait until you have enough money before you start saving. That day will never come. Commit to save a portion of your pay check every month and do it.
• It is more important to start saving than deciding which account to put the money into.
• The amount you save must be in your budget and it should go into your savings account before you pay any other bills.
• It is okay to start small; the fact that you are saving is the important thing.
• If you decide to save 5% of your income, make sure you apply it to all the money you get, including bonuses and gifts.

Budgeting is nothing more than having a plan for your money. When you draw up a budget, you decide how to spend your money. Your budget must show exactly how much you earn and exactly how much you spend. Once you know this, you can start making decisions about allocating your money differently, for example, by spending less on going out and saving more to reach a goal.

Here’s what you must understand about budgeting:

• You have to be honest for it to work. You must include ALL your income and ALL your expenses. There is no point in lying to yourself.
• If you have a partner or children, or other people with whom you share your money, involve them in the budget. When they understand the family’s money situation, it is easier to make good decisions and to avoid conflict.
• Track your expenses – every cent you spend – and use that information to refine your budget.
• Remember to budget in advance. You know schools start in January, so start budgeting a few months ahead for school-related expenses.
• Teach your children from a young age to budget.

Investing means putting money away for the long term, for example, in a retirement fund. Investments are the only way to build wealth because they grow in value over time and because your money starts to work for you.

Here are a few tips on investment for you to consider:

• Don’t feel intimidated by investments. They are not for rich people only and they don’t have to be complex. If you contribute to a pension fund, you are already investing.
• Investments allow you to earn interest on interest – also known as compound interest. The longer you leave your money in an investment, the more interest you earn, and the more interest you earn on that interest.
• Investing is the next step up from saving. Once you have established a saving habit, put a part of your monthly savings into an investment, and watch your money grow.

How can you learn more about money?

• We are very lucky to be living in a time when it is so easy to get information. The internet is full of financial literacy information: you can read articles, listen to podcasts, visit websites, and subscribe to blogs. Bayport’s own online Information Centre is chockful valuable information: https://www.bayportsa.com/information-centre/
• Thousands of books have been written about financial literacy. You can find them in libraries or at second-hand book stores, or you can buy them new.
• Identify people whose money management skills you admire and talk to them about debt, budgeting, saving and investments.

Financial wellness is possible for every one of us. Start improving your financial literacy today and set yourself up for the future.