Financial literacy 101: Smart money management

This is part one in our series “Financial literacy 101” check out part 2 here.

Your knowledge about money management affects the quality of your life. But for some reason, the way people talk about finances seem to be made deliberately complicated or tedious. They tend to start something like this…

“OECD (2012) defines financial literacy as personal knowledge and understanding of financial concepts to improve financial well-being. Put simply; you understand the basics of budgeting, a relationship between interest and your money value, tax and retirement planning, manage your debt responsibility, and . . .”

Yawn, that’s too much already! And the list goes on and on and on with more jargon and mumbo jumbo. It’s one of those things you know is important but secretly hopes your spouse or best friend is really good at, so you don’t have to deal with it.

But then again, some basic knowledge can go a long way.

Here are our selection of the basic concepts that might help you to score an extra point towards your financial literacy. Many of these will most certainly be familiar to you, but few have a firm grasp about what they really mean.

1. Your Gross and Net income

Your gross income represents the amount your employer owes you as a wage or as a salary before taxes. You know, the amount you discuss when you negotiate salary? That’s your gross income. Your net income, on the other hand, is the actual amount you get in your account after payroll tax, pension deduction and, depending on your location, charitable, state and health deductions. It’s the amount that always seems to be lower than it should be. Amiright!

Tip: If you work in different cities or commute to work, your payroll tax can differ, and you might be eligible for tax relief such as travel allowance.

For clarity: the term gross income has a different meaning if you apply it to businesses instead of individuals.

2. Payroll tax and Garnishment

A payroll tax is an amount you owe to the state. Usually, your employer deducts the amount from your salary and pays it to the state. Garnishment is when a court keeps an eye on your income as a result of unpaid child support, tax, or debit. An employer might be responsible for holding back garnishment before you even get your net income.

Tip: Check all deductions in your payroll. Some of them might be an extra tax that you might be able to reclaim at a tax return. In some occasions, you might be paying a fee that you are no longer interested in funding, like church membership. As for garnishment, well you can’t really do anything about garnishment except to pay it. Sorry 🤷‍♂️

3. Artificial scarcity

This one might have escaped you, even if I’m entirely sure you’ve come across it many times. Artificial scarcity is when a company creates an illusion of rarity for specific items, although they have the means to produce these items in abundance. Limited edition items are an excellent example of Artificial scarcity.

Tip: The next time you decide to buy consumer goods, have a think about the difference between the real value of the item and the manufactured value. If your intuition tells you that it is artificially inflated, skip your purchase. What goes up must comes down.

4. Just that basic budget

You heard this like a billion times, but it’s worth repeating; get yourself a budget. A budget is a simple list of your net income and your expenses.

Tip: The first rule of a budget is that you need to sit down with a pen and a paper right when you get your income and list the stuff that you NEED to pay. Rent, mortgage, bills, loans — all that boring stuff. Don’t forget to include automatic withdrawals on this list.

Once that’s done, list all the things that you WANT to spend your hard-earned money on. This will probably be more than what you have left. That sucks, but make sure that you are not spending money that you don’t have. If you don’t have it in your debit card, you can’t spend it. Your ‘wants’ should never drive you to use credit — that is a fast track to additional debt.

Pro tip: From time to time, it is good to check-on your recurring payments to see if you still need them.

Super pro tip: Once you are accustomed to using a set amount each month, start an automatic withdrawal to your savings account. This way, you’ll soon build up a buffer.

In our next post, we will dive into the sexy pool of interest payments, savings accounts, and capital expenditure from a personal investment perspective.

Try not to blush!

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