The importance of personal financial literacy in trying times

Personal financial literacy is a crucial skill necessary to navigate the current economic climate in Bangladesh. Being financially literate involves having financial goals, a budget, a retirement plan, an emergency fund and more. 

People must learn to make smarter financial choices, rather than chase side hustles and pay raises for instant gratification. Moving from job to job for salary increases does not improve one's financial health.

There are several reasons why personal finance literacy is essential in the current economic climate. Firstly, personal finance literacy enables individuals to make sound financial decisions based on their situation. It equips individuals with the necessary knowledge to budget, manage debt and investments, and plan for retirement effectively.

Secondly, in an unstable economy, individuals are exposed to various financial risks, such as inflation, unforeseen expenses and job loss. Personal finance literacy equips individuals with the knowledge to manage and mitigate these risks effectively.

Thirdly, individuals can achieve financial stability and independence. By doing so they can create a financial cushion for themselves and their families, plan for their children's education, and retire comfortably.

Finally, personal finance literacy instils discipline and responsible financial habits among individuals. It helps individuals avoid overspending, manage debt effectively, and avoid financial pitfalls that could lead to financial instability.

Personal finance is a soft skill that takes time to develop. One must start with the basics and continue to build their knowledge and understanding over time. Learning personal finance is managing money, maintaining financial discipline, and securing financial stability. The following can help you learn personal finance:

Educate yourself: There are many resources that can help you understand the basics of managing your money and investing wisely by collecting insights on improving your financial well-being and making informed decisions. 

One practical way to educate yourself is by reading books on personal finance. There are numerous books on the subject, ranging from beginner-level to advanced. For example, 'Rich Dad Poor Dad' by Robert Kiyosaki is a classic book that teaches readers the importance of financial education and how to become financially independent. 'The Total Money Makeover' by Dave Ramsey is another popular book that provides practical steps for getting out of debt and building wealth. These books offer valuable insights to help individuals make informed financial decisions.

Another resource for learning about personal finance is online courses which teach personal finance, often for free or at affordable prices. For example, Coursera is an online platform that offers courses on personal finance, such as 'Personal Finance,' which covers budgeting, investing and retirement planning. Khan Academy is another free online resource that offers courses on personal finance topics such as credit cards, banking and taxes. These courses provide a comprehensive understanding of personal finance, allowing individuals to manage their financial affairs confidently.

Know how to create a budget: A budget helps individuals make organised financial decisions and plan for a sustainable future. By ensuring that every expense has been accounted for, creating a personal finance budget enables individuals to manage their finances and avoid overspending.

To create a budget, the first step is to track all expenses, including daily expenditures such as groceries and rent, monthly bills such as electricity and gas, and annual expenses such as insurance premiums. Once all expenses are tracked, it is necessary to categorise them into essential and non-essential expenses. 

Essential expenses include bills and groceries, while non-essential expenses include shopping, dining out, and movies. This categorisation will clearly understand how much money is spent on essential and non-essential items.

Next, your income needs to be evaluated in line with expenses to determine if the expenses can be managed within the income limit. If expenses exceed income, adjustments must be made by either reducing expenses or finding ways to earn extra income. 

Several apps and tools can help individuals create and manage their personal finance budget. One such app, Mint, allows individuals to track and categorise expenses. Mint also recommends reducing expenses and investing money to achieve financial goals. Another popular app is You Need A Budget (YNAB), which creates a budget based on income and expenses and offers the flexibility to make changes as required. There are more apps, such as Personal Capital, Money Lover, PocketGuard, Robinhood, Good Budget, Everydoller, Fudget, etc., to manage personal finance.

Understand debt: Understanding debt is a crucial aspect of modern life. Debt, in simple terms, means an amount of money borrowed by an individual or organisation from another party with the promise of repayment plus interest. Debt comes in many forms, from credit card debt to mortgages, car loans, student loans, and more. 

Debt can be beneficial when used responsibly. For example, taking out a mortgage to buy a home can increase your net worth and provide stability and security. Similarly, student loans can enable individuals to pursue higher education and ultimately increase their earning potential. However, debt can also become overwhelming if not managed properly. High-interest credit card debt can quickly spiral out of control, leading to a cycle of minimum payments and accruing interest. And if one is not careful, loans taken out for vacations or luxury purchases can lead to significant financial strain.

One of the most critical aspects of managing debt is understanding its impact on your credit score (CIB Number). A credit score is a person's creditworthiness and is used by lenders to determine the likelihood of a borrower repaying their debt. Defaulting on a loan or making late payments can severely impact your credit score, making it more difficult to obtain future loans, mortgages, or credit cards. 

To help manage debt, the 'Debt Manager Planner and Budget Tracker apps can be a useful tool. This app allows individuals to input their debts and create a personalised payment plan. Users can set reminders for payment due dates and track their progress over time, helping them stay on top of their payments and avoid missed payments or accruing interest. The app allows individuals to track their monthly expenses and identify areas where they can cut back to free up money to pay off debt.

Learn how to start investing:  With the internet and modern technology, investing has become easier and more accessible. Learning how to start investing can initially seem overwhelming, but anyone can become a successful investor with the right guidance and a solid plan.

Your investment goals are one of the first things you should consider when investing. Are you investing for short-term gains or long-term wealth growth? Do you want a steady income stream from your investments, or are you willing to take risks for potentially larger returns? Your investment goals will play a significant role in determining what investments you should consider and whether you should work with a financial advisor or invest independently.

Another critical factor in starting to invest is your risk tolerance. Before investing your hard-earned money, you must be clear on how much risk you are comfortable taking. Investing involves some risk, but some investment opportunities carry more risk than others. Knowing your risk tolerance will help you make informed and responsible investment decisions that align with your goals.

Many investment opportunities exist, including stocks, bonds, mutual funds, exchange-traded funds, and real estate. Each investment type has unique advantages and risks, and choosing the right investment for you will depend on your investment goals, risk tolerance, and financial situation.

In addition to understanding the different types of investments, it's essential to understand how to build a diversified portfolio. Diversification is the key to mitigating risk when investing. Instead of putting all your money into a single investment, you can spread your risk by investing in multiple investments. This can minimise the impact of any investment performing poorly and help ensure your portfolio performs well over time.

Finally, it's important to have realistic expectations when starting to invest. Investing is a long-term strategy, and it's important to be patient and disciplined. 

'The Little Book of Common Sense Investing' by John C. Bogle provides a straightforward approach to investing, advocating for index funds and emphasising the importance of diversification. 'A Random Walk Down Wall Street' by Burton Malkiel - This book challenges traditional investing theories and advocates for a low-cost, passively-managed approach. 'One Up On Wall Street' by Peter Lynch - This book shares the author's experiences as a successful portfolio manager and provides insights for individual investors looking to find winning stocks.

The main idea behind these books is that successful investing requires a sound understanding of fundamental investment principles and a disciplined approach. By reading these books, you can gain valuable insights and learn strategies for building a successful investment portfolio.

Where to seek advice: A professional financial advisor who can help you plan and manage your finances effectively. They can offer personalised advice and create a financial plan tailored to your unique circumstances. Financial advisors can also help you invest your money wisely and provide guidance on taxation, field insights and market analysis.

Online platforms have made seeking personal finance advice easier than ever. Websites like Investopedia and The Balance provide a plethora of information on personal finance topics, including investing, debt, savings and retirement planning. These sites offer a wealth of knowledge and can help you understand complex financial concepts. Some of these sites even have interactive tools and calculators to assist you in your financial planning.

Finally, seeking advice from family and friends with experience managing their finances can also be beneficial. They can offer insights and share their experiences, providing a different perspective and helping you make informed decisions.

Knowing taxation: Knowing how to file taxes, understanding the different types of taxes, and being aware of any tax credits or deductions available are important for individuals, families, and businesses.

Firstly, online solutions have made it easy for the public to learn about taxation in Bangladesh. The National Board of Revenue (NBR) has developed an online portal that provides all the essential information related to taxation in Bangladesh. This portal contains detailed information about tax laws, rates, tax submission processes, and other essential information. Utilising this website lets you learn about taxation laws in Bangladesh.

Furthermore, many other websites and apps can help individuals learn about taxation. A popular example is the Tax Calculator developed by TaxBD, which helps individuals calculate their income tax liabilities effortlessly. Similarly, Android applications such as TAX BD and TAX Calculator Bangladesh provide individuals with useful information about the taxation laws in Bangladesh. 

Secondly, books can also be a useful and reliable source of information for individuals who want to learn more about the taxation laws in Bangladesh for personal finance. Books like 'Taxation in Bangladesh' by Muhammad Abdul Mannan and 'Handbook of Taxation in Bangladesh' by S M Zabed Ahmed provide comprehensive and thorough knowledge about the taxation laws in Bangladesh.

In conclusion, personal financial literacy is not a luxury but a necessity in the current economic crisis in Bangladesh. The high cost of living, an unstable economy, and the availability of credit have made it difficult for people to manage their finances effectively. 

Therefore, individuals must have the appropriate financial knowledge to make informed decisions about their financial future. Financial literacy is not just about spending less than one earns; it involves having financial goals, a budget, a retirement plan, an emergency fund, and more. Ultimately, financial health is not solely linked to how much one earns but how well one manages the money they have.

Mehedi Shamim is Head of Brand, Marketing, and Strategy of the Apex Property and Guest Faculty of the Department of Marketing, Jahangirnagar University. Email: [email protected]