Quite a number of the challenges we face that create the feeling of being overwhelmed and in over our heads, are connected to finance. The best strategy to overcome such feelings and profit from these valid concerns is to get your financial literacy right.
Below are three financial indicators to master so that you can live a financially free life:
- Income: Income is money earned from work, investments, business, support from spouse, etc. It comes as salary, bonus, self-employed commission, and drawings, passive or investment sources.
It is important to identify your sources of income as you can only manage or control what you are aware of. In some cases, you can control your income, i.e. working longer hours or a second job, taking on additional clients, choosing investments that provide higher levels of income, or working from home. In most cases, control is limited
- Expenses: These are the cash outflows used to meet your needs and wants. As you create a list of this, go further by classifying them into:
- Fixed Expenses: These are those foundational costs over which you have little monthly control. A good example will be utilities; the bills come in every month and while you might move to a slightly cheaper apartment, or turn the air conditioner down in the rainy season, without structural changes, this category is pretty locked in.
- Discretionary Expenses: These are those that you have a greater measure of control over. For example, you can shop at discount stores rather than premium name brand stores that feature the allure along with higher price tags. One might ask the benefit of buying facial tissues, laundry detergent, beauty and grooming stuff at high-priced supermarkets, other than convenience. You can choose whether to invest your vacation dollars on a trip to Europe or a less costly domestic adventure. The choices you make ultimately affect the amount of money leaving your pocket.
- Net worth: This is the sum total of your assets (bank account balances, savings, investments, etc.) minus your debts (loans, mortgage, credit card debt, etc.). Your net worth is the easiest way to get a big-picture perspective on how well you are doing financially.
This is just the beginning of getting your financial literacy right, the first time.