April is Financial Literacy Month in the US. How financially literate are you? And why does it matter?
Two-thirds of adults are financially illiterate
To be classed as financially literate, a person needed to understand three out of four basic financial concepts: interest rates, interest compounding, inflation and risk diversification.
Do you have a grasp of these four basic concepts? And does it matter?
Why financial literacy matters
Financial literacy enables you to make informed and effective decisions about money. And to avoid making downright bad decisions.
If you don’t understand the four fundamental financial concepts outlined above, you are likely to manage debt badly, save inefficiently and make misinformed decisions concerning the major financial commitments you make in life. Over a lifetime, this could cost you a fortune.
Two reasons you need to be financially literate
To ensure you are making sound financial decisions
If you don’t understand how interest rates and interest compounding work, you are far more likely to overspend and accumulate debt without realising how much unsecured debt is costing you over the long term.
To give an example, let’s say you treat yourself to a designer bag costing $1500. You put it on your credit card, which has an interest rate of 20%. You plan to pay off the debt at $40 per month.
How much interest will you pay overall and how long will it take you to pay off the debt?
While the bag may not seem like a particularly extravagant purchase, paying the balance off at such as a slow rate will cost you $873.63 in interest and take five years.
There’s no doubt that $1500 could have been put to better use. Paying for the bag on credit was not a sound financial decision.
With the increasing availability of credit products, many of which have high-interest rates and convoluted terms and conditions, it is only by understanding how interest and compounding work that you can make informed decisions about borrowing and repaying debt.
To plan for the future
With the days of final salary pensions over and state pensions increasing under siege, it is imperative to plan for your own financial future. If you don’t, no one else will do it for you and retirement will be a struggle.
Developing a financial plan with savings and investment goals is crucial to managing your finances and achieving a secure financial future for you and your family, but this is impossible without understanding the financial basics.
Again, interest and compounding are key to building wealth, but you also need to understand how inflation affects your savings and how to protect against investment risk with diversification. Without understanding these concepts, you may miss opportunities to build wealth or, worse, lose money.
How to become more financially literate
If you feel you haven’t quite grasped the basic concepts of interest rates, interest compounding, inflation and risk diversification, we recommend that you do some basic reading to ensure that you understand them. There is a wealth of financial information out there, but it can be overwhelming. As with everything, a coach can make it easier to learn.
And a good financial adviser is essentially a financial coach.
A professional adviser will not only build a financial plan with you but will also take the time to explain anything and everything that you don’t understand. Their advice will enable you to develop a solid understanding of the financial literacy basics to ensure that you are making sound decisions about what you do with your money.
In addition, they can advise on the myriad of investment options available to you as an expat in Asia, help you choose the right ones for you and your family and ensure you understand the cross-border laws and regulations that may affect you. You’ll gain peace of mind from knowing that you have made the right decisions to build and protect your wealth for a bright future.
To find a coach to guarantee your financial future, contact us for a free no-obligation consultation with one of our professional advisers based in Asia.
A leading provider of expat financial services and wealth management services across Asia.