The Covid-19 pandemic has had a devastating effect on families and communities globally. With regard to finances alone, household borrowing in the UK has shot up 66% – a result of lockdowns, furloughs, unexpected redundancies and general panic. Of course, household debt was unusually high even before the pandemic; with a country slipping quicker and quicker into a debt crisis, systemic solutions need to be found. But in the meantime, there are things you can do personally to gain control of your money, and potentially avoid your own debt crisis, summed up in two words: financial literacy.
What Is Financial Literacy?
Financial literacy is, simply put, a comfortable and nuanced understanding of your personal finances – and an ability to utilise your money wisely in the pursuit of different, simultaneous financial goals. It speaks to restraint, a control you have over your money, and a shrewdness when it comes to savings, investments, retirement funds and debt management.
Why is Financial Literacy Important?
Financial literacy is not a one-stop shop for answers to money issues, nor can it erase the damage done by the pandemic – but it can put more power in the hands of consumers, and prevent costly mistakes in the form of poor financial decisions, or little slip-ups that cost. Financial literacy means knowing when the 0% interest on your credit card expires – and knowing to transfer any debts before they are artificially increased. It means having the presence of mind to set aside enough money for an emergency savings fund each month, as well as your pension. It means the difference between starting the house-buying process while still in debt to your bank, and clearing your debts for a better mortgage deal. It is the power of knowledge, and while it might not miraculously increase your income, it can ensure that you keep as much of it as possible – and in all the right places. This is a crucial skill in the post-pandemic world, as the cost of living increases and predatory loan companies become all the more persuasive.
How to Improve Your Financial Literacy
The first step to financial literacy is research. Make sure you understand the terms and language of finance, to ensure you know exactly what you’re getting into with every new move. This means knowing the difference between APR and AER, understanding how compound interest works, knowing what is expected of you by banks, pension funds, ISA’s and lenders – and even the basics of investment.
If you’re struggling to get your head around some of these ideas – or the idea of managing your finances on top of your work and home life – it could be a good idea to trust a service with your wealth management needs. This way, you needn’t spend hours doing the due diligence, having trusted someone else to do it for you, and present you with the best possible options.
Your next step is to create a plan. This plan might include certain goals, for example the setting up of an emergency fund or the increase of payments into a pension fund. Emergency funds should aim to hold 3-6 months of living expenses, giving you that cushion in the event of a redundancy or surprise maintenance cost.