You might never know how painful it is to be short of finance until you need money for something important and you aren’t able to get it. It is important that everyone learns the concept of financial literacy, because it is the only way you can achieve financial success. Financial Success is simply being well placed at the top of your financial situations and this can only be achieved by the following steps.
Make the commitment
This is an important step to attain financial success. By now, you know that your actions and your attitude toward money are what drive your saving and spending habits. Hence, you have to make the commitment to yourself and your family to invest in taking responsibility for your financial situation. Your commitment has to be sustainable. In other words, you cannot decide to adopt a budget for one month and break it the next. Some individuals might have to seek professional help or get a targeted education before they fully realize they "need" to make the commitment if they are to reach financial security and freedom of choice.
Assess your financial situation
This is a form of personal examination of your financial record. You need to examine each core of your earning, saving, spending, borrowing and protecting. This step is the process of financial discovery. It is to help you document your financial behavior and think of ways to improve your earning, saving and investing as you eliminate wasteful spending and make plans to stay protected in insurance and retirement. This assessment is critical, as it builds the foundation for your improvement.
Clean financial clutter
This step means many things to many people. Basically, it is a suggestion for you to become organized in your financial transactions. You need to eliminate the clutter so you can focus on improving your financial situation. An example would be to dedicate a physical or cyberspace to conduct your financial transactions so you stay organized, or re-grouping your credit cards into a manageable 2 or 3 cards. Cleaning the clutter is the result of taking actions after you assess your financial situation to improve your financial transactions and get a handle of your financial records.
Create a budget
This step is the foundation of financial literacy. A good budget has to be sustainable, and simple to follow, so you don't break your commitment out of frustration. A budget has to allow for freedom of choice items and still maintain the security concept we discussed in the prior chapter. A budget that does not give you security and freedom of choice is not a successful budget.
Know the rules
In addition to understanding the theories, core competencies and elements of financial literacy, you need to know the rules for financial success. The 2 most important rules are the 20/10 for managing debt and the rule of 72 for managing investments.
1. Rule of 20/10 - Your total outstanding debt should not exceed 20% of your total net yearly income. Your monthly debt payment (not including mortgage) should not exceed 10% of your monthly net income.
2. Rule of 72 - To find out how long it takes for your invested money to double in value, Divide 72 by the expected interest rate you hope to earn. The result gives you the approximate number of years it will take for your investment to double. Years to double = 72 / Interest Rate