Within the framework of attending to one’s daily
life, taking on financial decisions is becoming easier yet increasingly more
intricate at the same time. Managing personal finances still remains an enigma
for many people. Those who lack sufficient knowledge in areas like budgeting,
saving, investing, as well as debt are more prone to make bad decisions within
the space of personal finance. Adequate and complete negligence towards this
problem arises from the absence of appropriate financial education during ones
formative years. Society must concede that including financial education within
the school syllabus is no longer a choice but an urgent prerequisite in
fostering self-sufficient citizens that know their way around technology and
finances.
Students receive thorough teaching in a good number
of academic disciplines, yet practically useful subjects going as far as the
discipline of personal finance, is left untouched. Young adults concluding
their secondary education know so to speak everything about calculus or even
literature yet they completely lack the understanding of having a plan to
manage student loans, retirement, or distinguishing between both good and bad
debt. The fallout of this is increased financial illiteracy which in turn can
lead towards a very low credit score and crippling debt to uncontrollable
spikes of wealth creation opportunities.
Why is financial education in schools so
crucial?
• Facilitating Informed Choices: Financial literacy
enables people to make considerations throughout their lifetime. Knowing how
issues such as compound interest, inflation, and risk management works allows
students to approach these issues with courage as opposed to apprehension or
ignorance. They learn to differentiate between needs and wants, set realistic
financial goals, and create actionable steps towards achieving them.
• Cultivating
Responsible Consumers: In this era where advertising is pervasive, easy
credit is available, and goods are marketed to the youth, exploded spending and
unsustainable debt are harmful trends. Financial literacy equips them with the
ability to critically assess financial products, the accompanying terms,
conditions and how to identify predatory practices. It is a powerful tool that
shapes responsible consumers and promotes the culture of saving for the future
instead of instant gratification.
• Preparing
for Life's Milestones: All major milestones in one’s life such as buying a
first home, funding one’s higher education, retirement, and managing a family
budget are financial decision-making milestones. Such concepts, when taught to
learners in a controlled environment, prepare them for future obstacles that
they are bound to encounter, and enables them to think ahead and develop plans
rather than learn through expensive life lessons down the road.
• Reducing
Financial Stress and Anxiety: Generally, stress results from financial
concerns for adults. With the right financial education at an early age,
individuals can build structures of control and security which prevents them from
falling into debt traps and experiencing financial instability. This promotes
mental well-being and enhances peace of mind.
• Promoting
Economic Stability: An entire population that is financially illiterate is
vulnerable economically. Financially literate people are economically stable.
When people are competent in managing their finances, it positively impacts
their local economies and the entire national economy. It fosters
entrepreneurial activities, promotes investments, and responsible borrowing,
all crucial for sustainable development.
Financial literacy involves understanding several
key concepts that govern our personal and economic well-being. While they are
all interconnected, each term has a distinct meaning and role. Here's a
breakdown of the differences:
Earning
Earning refers to the income you receive in exchange
for your labor, services, or capital. It's the money that comes into your
possession.
• Examples:
o Salary
or Wages: Money received from a job.
o Freelance
Income: Payments for specific projects or services rendered independently.
o Business
Revenue: The total money generated by a business from sales of goods or
services before deducting any expenses.
o Investment
Income: Money earned from investments, such as interest from savings accounts,
dividends from stocks, or rental income from property.
Expense
An expense is any cost incurred in the process of
generating income or in the course of daily living. It's the money that goes
out.
• Examples:
o Living
Expenses: Rent/mortgage, groceries, utilities, transportation, clothing.
o Business
Expenses: Cost of raw materials, salaries of employees, rent for office space,
marketing costs.
o Loan
Payments: Principal and interest paid on debts.
o Taxes:
Payments to the government (see "Taxation" below).
Profit
Profit is the financial gain, especially the
difference between the amount earned and the amount spent in buying, operating,
or producing something. In simpler terms, it's what's left after all expenses
are deducted from earnings.
• Formula:
Profit = Earning - Expenses
• Types:
o Gross
Profit: Revenue minus the direct costs of producing goods or services (Cost of
Goods Sold - COGS).
o Operating
Profit: Gross profit minus operating expenses (e.g., salaries, rent, marketing).
o Net
Profit: The final profit after all expenses, including interest and taxes, have
been deducted from total revenue. This is often referred to as the "bottom
line."
Savings
Savings refers to the portion of your current income
that is not spent on consumption but is set aside for future use. It's
typically held in a highly liquid and low-risk account, like a savings account
or a fixed deposit.
• Purpose:
o Emergency
Fund: Money put aside for unexpected events (e.g., medical emergencies, job
loss).
o Short-term
Goals: Saving for specific purchases in the near future (e.g., a new phone, a
vacation, a down payment on a car).
• Key
Characteristic: High liquidity (easy to access) and typically lower returns
compared to investments.
Investment
Investment involves allocating money with the
expectation of generating a return or appreciation in value over time. Unlike
savings, investments usually carry a higher degree of risk but also offer the
potential for higher returns.
• Purpose:
o Wealth
Creation: Growing your money significantly over the long term.
o Long-term
Goals: Saving for retirement, a child's education, or buying a house.
• Examples:
o Stocks:
Owning a share in a company.
o Bonds:
Lending money to a government or corporation in exchange for interest payments.
o Real
Estate: Purchasing property to generate rental income or for capital
appreciation.
o Mutual
Funds/ETFs: Pooled money from multiple investors to invest in a diversified
portfolio of assets.
• Key
Characteristic: Lower liquidity (may take time to convert to cash) and higher
potential for both gains and losses.
Taxation
Taxation is the process by which governments levy
mandatory financial charges (taxes) on individuals or corporations to fund
public expenditures. It's a portion of your earnings or profits that you are
legally required to pay to the government.
• Types:
o Income
Tax: A tax levied on an individual's or company's income or profits.
o Sales
Tax (GST/VAT): A tax on goods and services purchased.
o Property
Tax: A tax on real estate.
o Capital
Gains Tax: A tax on the profit made from selling an asset (like stocks or real
estate) for more than its purchase price.
• Purpose:
To fund public services such as infrastructure, education, healthcare, defense,
and social welfare programs.
In essence, earning is the money you bring in,
expenses are the money you spend, profit is what's left after expenses from
earnings, savings is unspent income set aside for immediate or short-term
needs, investment is unspent income used to generate future wealth, and
taxation is the portion of your earnings or profits that goes to the
government. Understanding these distinctions is fundamental to managing
personal finances effectively and achieving financial goals.
