Financial education refers to a set of core concepts for managing your finances effectively. Although there is a wealth of information available on the topic, it can be summarised into 5 main principles. In this article, we examine the 5 must-know facts about financial education, from budgeting and taxes to estate management. We give you the tools you need to meet your financial goals with these must-know facts.

1. Budgeting

What is the purpose of money? Managing your money effectively goes far beyond simply splashing out or saving for a rainy day. Reframing your point of view can help you get the most out of your money, from saving to spending or even investing, making your money work for you. Striking a balance between these purposes is key. A budget is a tool used to help you decide how to spend your money, considering your financial goals for both the short term and long term. Many budgets begin with this simple formula:

Income — Savings = Expenses

The formula indicates that your savings should always take priority, being the first thing to be subtracted from your total income. Expenses then come from what is left over after savings have been set aside. Take this one step further and consider categorizing your expenses into fixed and flexible expenses, in other words, things you really need vs. things you want.

2. Taxes

Different sources of income are taxed in different ways. You could have income from several different sources hitting your account each month, income from employment, investment, inheritance and unexpected income, such as a lottery win or gift. For instance, income from employment is usually taxed at the marginal tax rate, whereas inheritance income is usually tax-free. Unexpected income such as a gift or prize-winning is not usually taxed upon receipt, whereas the tax on investment income varies depending on the type of investment.

Consult your accountant or tax advisor to ensure you incorporate tax benefits into your financial planning where possible and avoid any negative tax consequences for certain decisions.

3. Credit

In finance, borrowing money is usually referred to as credit. Credit is a form of loan, giving you the ability to purchase something on credit and promise to make repayments in the future.

When you borrow money, this information is recorded and shared with a credit bureau. Further information such as whether you’ve made your payments on time, any missed payments and what debt is outstanding will also be shared with the bureau. This information is used to form your credit score. Your credit score is then used by lenders to indicate your capacity to repay loans.

Scores are rated from 300 to 900, with scores over 650 meaning you are likely to qualify for a standard loan.

To maintain a good credit score, you should ensure you pay all your bills on time. It is better to contact the lender and renegotiate payment terms than miss payments altogether.

There are three main types of credit, which range from credit cards to personal loans and lines of credit. All of these types of credit come at a cost, in the form of the interest and fees charged by lenders.

Remember, borrowing is a normal part of life. With careful planning and a clear understanding of your financial goals, you can use credit to help you pay for your education, buy a car or take out a mortgage. All of this will go towards helping you build a good credit score. Very few people have the ability to make these major purchases independently without the use of credit.

4. Financial Planning

Set financial goals for yourself and determine which types of planning and investment you will use to achieve them. Begin by distinguishing between things you would like and things you need. By setting realistic goals you can work towards them in confidence, knowing you are on track for hitting your targets.

There are two main approaches generally used for planning finances. Simple projection, which is recording your short and long-term goals with a simple cash flow analysis and more detailed planning. Comprehensive financial planning helps individuals achieve more complex financial goals over the course of a lifetime and beyond, as part of their estate.

5. Investment

Investments operate based on the correlation between risk and return. Earnings from investments can be used to meet your financial goals. You can earn more from your money through investment than by simply saving it in your bank account. It’s important to remember that for most types of investments, returns are not guaranteed. This means that there is always the possibility of losing the money you’ve invested.

We all know the popular adage, “don’t put all your eggs in one basket”. When it comes to investments, you will often hear the term ‘diversification’. It’s important to diversify your investments in order to create a varied investment portfolio. By investing small amounts across several types of investments, you can reduce your overall degree of risk. This makes your investments less volatile.

Everyone has their own individual level of risk tolerance when it comes to their finances. Some people are prepared to take risks in pursuit of higher returns whereas others are looking for slow and steady progress. Deciding whether you are risk-averse, risk-tolerant or somewhere in between is the first step to deciding what type of investments are of interest to you. This combined with your investment time horizon, how comfortable you are with market fluctuations, any other sources of income you have and your cash flow needs are used to form your risk tolerance and investor risk profile.

Life moves fast these days, and many people forget to take a step back and consider their financial planning. Effectively managing your finances might seem overwhelming at times. These 6 core concepts give you all the tools you need to help you stay on top of your finances, whatever life throws at you.

Learn more about being a good financial planner and investor by keeping an eye out for daily articles posted on our blog. Stay on your journey with Your Friendly Crypto Exchange, IXFI.

Disclaimer: The content of this article is not investment advice and does not constitute an offer or solicitation to offer or recommendation of any investment product. It is for general purposes only and does not take into account your individual needs, investment objectives and specific financial and fiscal circumstances.

Although the material contained in this article was prepared based on information from public and private sources that IXFI believes to be reliable, no representation, warranty or undertaking, stated or implied, is given as to the accuracy of the information contained herein, and IXFI expressly disclaims any liability for the accuracy and completeness of the information contained in this article.

Investment involves risk; any ideas or strategies discussed herein should therefore not be undertaken by any individual without prior consultation with a financial professional for the purpose of assessing whether the ideas or strategies that are discussed are suitable to you based on your own personal financial and fiscal objectives, needs and risk tolerance. IXFI expressly disclaims any liability or loss incurred by any person who acts on the information, ideas or strategies discussed herein.