Money Management and Financial Skills
Financial literacy is defined as the ability to understand and use various financial skills. These include being able to manage your money, carry out budgeting and make investments.
Frighteningly, figures from the World Bank suggest that only one in three people around the world are financially literate. The figures are far worse for women, poor people, and those with lower levels of education. What’s more, this is very much not only a problem in developing countries: only 57% of Americans are considered financially literate.
This is a problem. People who are not financially literate tend to incur higher charges for loans, and run up bigger debts. Meanwhile, people who are better at financial planning tend to have more savings for retirement, and are better able to manage investments and risk. This section of SkillsYouNeed aims to help you to acquire the essential skills needed to understand finance, and manage your money effectively.
The importance of talking about money
Astonishingly, more people in the UK believe that it is taboo to talk about money (50%) than about sex (42%) or religion (26%).
The same study found that over a quarter of people have lied to friends or family about their personal finances, and that 65% have talked about winning the lottery, but only 34% have ever discussed their will with anyone.
This way lies madness.
It is crucial that we talk about money. We need to break down these taboos, and start being more open about financial issues, if only to increase financial literacy, and reduce the stigma about asking questions about money.
There is more about this in our page Talking About Money.
Money Management | Managing Your Money
The first area of essential financial skills is those that enable you to manage your money effectively.
Before you can do anything else, you need to understand how much money you have coming in, and how much you have going out. It is crucial that your outgoings are lower than your income, or you will have a problem.
Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.
Wilkins Micawber, in Charles Dickens’ David Copperfield.
The best way to establish this is to go through a process of creating a budget, a plan for how much money you have, and how you will spend it. There is more about this in our page on Managing Money: Budgeting.
Once you have established your income and expenditure, you can then start to look at whether you need to make any changes. Your ideal position is that your income more than covers all your spending needs, and you have at least some money left over each month to save into a contingency fund.
However, few of us are in this fortunate position. Indeed, figures show that over half of Americans are anxious about money. Two-thirds of American families do not have any contingency funds at all.
It is therefore far more likely that you will find that you would like a bigger cushion between your income and your expenditure.
There are two main ways to achieve this:
Making more money, including through having a second job, or ‘side hustle’; and
Reducing your outgoings, otherwise known as spending less.
There are plenty of areas that you can target for savings. You may find it most helpful to start with our Top Tips for Saving Money, as this gives you a broad overview.
You could also simply try avoiding the temptation to spend money, for example, by removing shopping apps from your phone, or getting rid of some of your credit cards. There is more about this in our page on Avoiding Spending.
Other pages on specific ways to save money include:
Saving Money on Your Car, both running costs and insurance;
How to Save Money on Your Phone and Phone Contract by shopping around, and particularly only paying for what you really need;
Saving Money on Household Bills, including utilities, broadband and phone;
Saving Money on Food and Groceries, including by reducing food waste;
Saving Money on Clothes, for example, by looking after them effectively; and
Saving Money on Other Purchases, including the advantages of saving up if possible, rather than buying on credit.
One of the most important aspects of learning to manage your money is clearing any debts. Our page on Getting Out of Debt explains more about how you can start to do this, and suggests some strategies to use.
When you first start work, the future may seem like it can take care of itself. You may well be finding it hard enough simply to afford your rent, food and any student debt repayments. You don’t want to have to think about anything more.
However, the future tends to arrive quite rapidly—and often sooner than you intended.
It is a good idea to start thinking ahead financially from a very early stage. It can help you to achieve goals such as saving for a deposit on a house or flat, and being able to demonstrate that you are a good candidate for a mortgage. Obviously your goals will change as you move through life, but habits of financial planning and review will mean that you can change your behaviour to meet each new goal as it arrives.
There is more about how to build good financial planning habits in our page on Long-Term Financial Planning.
A Specific Case of Financial Planning: Covering Contingencies
Once you have reached a point of financial stability—that is, your income is comfortably bigger than your outgoings each month, and you can afford to save some money—it is time to start doing some contingency planning.
You need to be confident that if your circumstances change—for example, you lose your job, or become ill, or your family situation changes—you will still be able to manage.
Generally speaking, there are two ways to do this. You can manage the risk yourself, by saving up money into a contingency fund, or you can pass the risk onto someone else, by taking out insurance. Our page on Financial Contingency Planning explains more about how to decide what to do in different circumstances.
One specific area that repays careful financial planning is retirement.
Building up a strong retirement fund takes years—ideally, all your working life. You therefore need to start thinking about it as early as possible, even if you’re on a zero-hours contract. It is also worth getting good independent advice about pensions at that stage.
There is more about these issues in our page on Planning for Retirement.
Improving Your Financial Literacy | Understanding Financial Issues
An important aspect of financial literacy is simply understanding financial issues.
There are so many issues, both on a personal level, and in economic terms.
For example, in personal finance, why do people sometimes say that using credit cards is bad? What do we mean by compound interest? What is a credit score?
Looking to broader economic issues, there are even more questions. What is inflation, and why does it happen? What is a cryptocurrency and should you invest in one? What is meant by investing? What is the risk–reward trade-off?
You can find answers to these questions and many more in our pages explaining various financial issues, including:
Loans and Savings, which explains the different ways that you can borrow money, and why banks can afford to pay you interest on your savings.
Understanding Interest, which explains how banks calculate interest on loans—and why you cannot afford to just stop paying off a loan.
Online Banking and Finance, which describes issues that relate specifically to banking and other financial services carried out using the internet, rather than in person in a branch or broker’s office.
Understanding and Improving Your Credit Score, which explains how banks and other lenders decide whether to lend you money.
Understanding Mortgages, which explains what we mean by a mortgage, and the different types available. It also describes how banks calculate the amount to lend (and how you should decide how much to try to borrow).
Understanding Digital and Cryptocurrencies, which explains about different sorts of digital currencies, including cryptocurrencies, and discusses their advantages and disadvantages as both money systems and potential investments.
Understanding Investing, which explains when you might want to consider investing, and how to assess the balance between risk and reward.
Understanding Inflation, which explains what we mean by inflation (the decrease in the purchasing value of money over time) and describes some of its causes. This is important to understand, because it can affect all kinds of choices about money, including whether to save or borrow.
A broad understanding of all these issues will take you a long way towards being financially literate.
In Search of Definitions
Finally, if you are looking for a definition of any of the terms used in this page or any others in the finance and money management section of SkillsYouNeed, you may want to have a look at our Finance and Money Management Glossary.