Personal Finance Basics: The Definitive Guide to Financial Literacy

Statistics show that only 33% of adults globally are financially literate. This indicates that roughly 3.5 billion adults worldwide lack the holistic knowledge on how money works, or in other words financial literacy.

Financial literacy refers to an individual’s proficiency in personal finance; from budgeting for daily expenses and monthly bills, saving money, borrowing money and managing debt, to investing and planning for retirement. Needless to say, these are the skills that are key to achieving financial stability, and ultimately financial freedom.

How do you think you’ll measure if you evaluate your personal finance skills? Keep in mind that being financially literate means knowing how to manage your money. This includes know-how on:

  • Allocating for expenses (Ex. Proficiency in monitoring expenses and budgeting accordingly)
  • Saving money (Ex. Knowledge and observance of saving strategies)
  • Paying bills (Ex. Awareness and utilization of various payment channels and methods)
  • Using Credit (Ex. Knowledge on various credit options and requirements)
  • Borrowing Money (Ex. Understanding of how interest works)
  • Investing and planning for your retirement (Awareness of various investment vehicles)

It’s a tall order, but a necessary one.

Not knowing how money works may lead you to make poor financial choices. For instance, if you don’t understand how interest can build up overtime, you may treat your credit card a as golden pass. Swiping it whenever you want and failing to settle your balance responsibly will lead you to an endless cycle of debt.

If you’re still living paycheck-to-paycheck after years of working or scrambling to pay your debts and bills, then keep reading. Below is an infographic that illustrates the fundamentals of personal finance. It will run you through everything you need to know to make smart financial decisions.

Becoming financially literate is the key to budgeting and saving wisely, it will keep you away from debt, and secure your future.

Money Management 

Is there something you want to buy right now? One of the major reasons why people end up in a vicious debt cycle is because they don’t know how to budget and save for what they need and want. Here’s a step-by-step plan for budgeting and saving to set yourself up for success.

1. Budgeting

Budgeting sounds easy, but the application is challenging because it requires discipline. You need to look at the big picture: your income, fixed expenses, number and amount of all your debt, and spending habits. This will help you take better control of your money.

Here are four essential steps to help you develop a successful budget plan:

Step 1: Track your monthly expenses

Take time to sit down with your finances to see what your typical monthly expenses look like. You can write it down or download an expense tracking app to monitor your monthly costs. Be meticulous about this since it can be easy to overlook.

You can follow the 50/20/30 method: 50% on needs (fixed expenses), 30% on wants (non-essential costs like subscriptions, movies, dine outs), and 20% on savings. This is after-tax income.

Step 2: Identify and study your fixed and variable expenses

Determine the fixed costs where your money must go each month, such as rent, electricity bill, water bill, internet, phone bill, mortgage, car payment, and loans.

Meanwhile, variable expenses are costs that rise and fall (and go) every month: groceries, haircuts, etc. To manage it wisely, identify where you can cut corners to allocate your money on more important funds (i.e., savings, investments).

Step 3: Factor in savings

An essential step in budget management is to pay yourself first; this doesn’t mean to spend it on leisure. Take a certain and fixed amount every payday and put that into your savings account. Make this step a habit. The rule of thumb is to allocate 20% of your income to savings and investments.

Step 4: Set your budget

Now that you have a clear picture of how much you need to spend monthly, you can move on to making cuts in your fixed and variable expenses, wherever possible, to maximize your finances. The remaining cash should serve as the allowance you’ll need to carry on with your day to day.

2. Saving

Worldwide, roughly 57% of adults save money, 27% of that population use a bank or other financial institution. You need to build a savings fund to keep you covered in case of rainy days. The fund can be handy at times of immediate needs, emergencies, and for your personal and professional needs. Sounds so much better than taking a loan or borrowing from friends, right?

Here are four steps to help you develop good saving habits:

Step 1: Break down your savings goal into actionable chunks 

The bigger your goal, the more overwhelming and difficult it is to reach. Break your savings goals into bite-size amounts for more realistic expectations. For instance, if you plan to save PHP 40,000 in a year, you can set aside PHP 3,333 per month or about PHP 833 per week.

Step 2: Cut costs to achieve it

Now that you’ve set actionable goals, it’s time to figure out what you can do to reach those goals. You can identify where you spend most of your money on non-essential expenditures and see if you can spend less on specific areas. For example, here are some areas you can cut costs on:

  • Save PHP 150 by skipping your morning coffee run
  • Save PHP 150 daily by packing your own lunch and snacks
  • Save PHP 20 daily by bringing your own bottled water to work
  • Save PHP 500 by cancelling your cable plan you rarely use

Additionally, you can do money challenges, like the “Ipon-Shade” challenge where you can save up to PHP 53,000.

Step 2: Look for ways to earn more money

When you find cutting costs isn’t enough to save more, find other ways you can earn more. Saving doesn’t only work by cutting and reducing expenses, finding other sources of income can effectively boost your savings account.

Do you have skills you can put to good use, such as photography or graphic design? You can take on freelance jobs to earn more. It would be better if it’s something you’re passionate about, so you won’t feel burdened by getting a side stint.

Step 3: Secure your saved money in a savings account

Open a savings account. Keep your saved money safe from your impulsive spending habits. When it’s out of sight, you have nothing to spend. Keeping it in your wallet, in a checking account, or in a money bank makes it more tempting to use for unnecessary expenses—we’ve all been there.

It’s also best to set up automatic transfers between your checking account and savings account to “pay” yourself first. This ensures that you regularly save and build the fund.

Step 4: Have spending roadblocks in place

Finally, once you’ve straightened out your saving strategy and built a sizeable amount, do everything you can to keep it that way. Here are a couple of ways you can prevent yourself from spending it:

  • Leave your credit card at home to curb any urges of impulse shopping
  • Bring only an adequate amount of cash daily to keep you from overspending or buying unnecessary things.
  • Stick to cash, so you only spend the money you see and stop relying on credit cards

Debt Management 

There’s a stigma around debt. But the thing is, debt isn’t always bad. A loan can be a useful tool to get you through a financial dilemma. Getting a loan is a quick solution to move past time-sensitive emergencies.  Just remember that the key is to manage your debt wisely and to prepare yourself for the responsibility.

Below are notable debt management tips that can help you deal with loans responsibly.

1. Understand how interest works

A crucial part of being a prudent borrower is understanding how interest works.  Interest rate is the percentage a lender charges on top of the money you’re borrowing.  Interest rates are typically quoted annually, but to be sure, always ask the lender.

For example, if you borrow money and the annual interest rate is 10%, it will cost you 10% of the amount borrowed. That percentage will be repaid along with the principal you borrowed.

Sample calculation:

If you borrow PHP 1,000 at 10% annual interest rate to repay within six months (half a year or 0.5), that’s

(1,000) X (.10) X (0.5) =50

The interest is $50.  You must pay that on top of the principal money you borrowed. Which means that at the end of 6 months, you’ll have to pay PHP 1,050

Keep these in mind:

  • With interest rates, the sooner you repay, the better.
  • The lender typically has the discretion on how much interest rate to charge.
  • Governing agencies regulate lenders to ensure that the rates are fair.
  • Informal lenders, like 5-6 operators should be avoided at all cost. They are not regulated; hence you will not be protected if they charge exorbitant fees.

2. Create a monthly debt payment calendar

Make a list of the people or entities you owe and how much you owe them. Include the monthly payment amount and due date for a better image. Then, create a monthly calendar to mark the due dates. Write down the payment amount and creditor next to it. Not only does this make for easy and efficient debt tracking, but it’s also a convenient way to remind you that you have debts to pay.

3. Pay your bills and pay on time

If you’ve skipped a payment before, then you know the consequences you’re up to. When you ignore your creditor and fail to pay completely, your account will be turned over to a credit collections agency. This goes all on record, which can mar your credit history. Ultimately, it will hurt your credit score and prevent you from accessing other credit options like bank loans or a credit card.

Think hard before you skip a due date because it will only make it harder to repay your debt, no thanks to late fees for every missed payment. Missing payments in successions will increase your interest and late charges, drowning you in even more debt. This is an absolute no-no.

Synchronize your monthly debt calendar on your phone calendar and set an alert to remind you a few days beforehand regarding your due dates.

4. Make the minimum payment

Whenever you can, at least pay the minimum amount of your monthly bill. This may not show significant changes when paying off your debt, but it sure keeps the amount from growing. Doing so can also put your account in good standing.

5. Find out which debts to prioritize

If you acquired multiple credit card debts and loans, the best course of action is to pay off your credit cards first since these incur the highest interest rates and finance charges. After your credit card(s), rank your other debts based on urgency and importance to pay off. Alternatively, you can opt to repay the one with the lowest balance to clear it from your list.

You shouldn’t feel iffy about taking debt, especially when you’re confident that you can be a responsible borrower. Know what kind of loan and when to get the right one for your situation.

If using your credit card, borrowing from friends, and applying a bank loan aren’t options, consider credit apps as an alternative, like Cashalo’s credit app. Cashalo is a secure and trusted digital credit platform that offers fast approval, helping you address any financial dilemmas in no time.

Investing and Retirement Savings

When you invest, you put your money to work; growing your savings more overtime, with minimal effort from you. This is how you build your wealth, which is why investing an essential skill to learn on your road to financial literacy. In the Philippines, only 3% of Filipino adults invest in bonds, funds, and stocks. That figure needs to change. If you wish to retire wealthy and stable financially, you need to start learning about investing.

The earlier you can build your wealth, the younger you can retire if you want. Here are some avenues where you can put your money.

  • Small Business – Use a portion of your savings to invest in a lucrative small business, such as a water refilling station or a laundromat
  • Insurance Investment – This refers to insurance policies that also work as investments where, after some time, a portion of the premiums become investments. As the premium grows, so does your investment.
  • Mutual Funds – An investment medium handled by professional fund managers that enables individual and corporate investors to buy ownership shares of a company through stocks, bonds, and other vehicles.
  • Stocks – This is a high-risk mutual fund invested in the shares declared in the Philippines Stock Exchange. It offers big returns in the long run.
  • Bonds – A type of fund invested in a mix of fixed-income investments issued by corporations or the government. This is a moderate-risk investment.
  • UITF – Unit Investment Trust Funds (UITF) are ready-made investment that allows the collection of funds from different investors. Investors participate by purchasing units, which are then invested in different financial vehicles.

Learn More about Financial Planning and Management

 To help improve your financial knowledge and learn more about financial literacy, you can read up on resources tackling the subject. Here are a couple of places to check:

Investopedia – To help you hone your investing skills, learn more about money management, and understand complex financial concepts.

NerdWallet – For expert tips and advice on making the right financial choices and getting more out of your money.

Moneymax PH – Helps millions of Filipinos who don’t know where to start by comparing local financial products.

Cashalo – Bookmark the blog to get financial tips, from budgeting to saving, for everyday Filipinos.


Make Smart Financial Decisions Now

Overall, your knowledge and attitude towards money are beneficial not only for your financial position, but also for your quality of life.

You can rely on Cashalo to help deal with your financial predicaments. The credible online lending platform in the Philippines not only works toward offering financial inclusion through its credit app, but also seek to provide financial literacy to Filipinos through the Cashalo blog.

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