Financial Education: Achieving Financial Independence
Financial Education: Achieving Financial Independence
Financial education is much more than just saving money. It consists of practices aimed to bring quality of life both in the present and in the future.
Saving, cutting unnecessary expenses, investing and increasing your amount is important. But these are just a few possible activities to increase wealth. Financial education involves financial and emotional factors, such as controlling expenses, setting personal goals and targets. Let's learn a little more about this subject?
What is Financial Education?
Financial education is a process in which individuals make conscious choices and keep up-to-date with the economy to determine the best way to handle their money. With information and guidance, individuals and societies improve their understanding of financial concepts and products.
Financial education is much more than just saving money. It consists of practices aimed to bring quality of life both in the present and in the future. It provides guidance on how to build a financial plan for well-being and security.
Financial Independence: A Possible Dream
Financial independence consists in being able to maintain the desired standard of living without having to depend on the salary of a steady job. The idea is to have a financial balance and work for pleasure or choice rather than the need to pay the bills at the end of the month.
It can be built from the combination of a set of income, resulting from assets – such as property rent and investment income – and other income that are guaranteed to be received – such as retirement, pensions, private pension or dividends.
Achieving Financial Independence
Many people associate the build-up of money and financial independence with luck. But this is not always the case. Financial independence can be the result of planning for someone who is financially well-educated. Follow these steps and start your journey:
1. Personal financial diagnosis
The first step is to survey your fixed income and expenses. Income represent amounts received. Expenses, in turn, are the outflows of funds. It can be routine (energy bill, internet bill, monthly fees) or occasional (trips, shopping, renovations, etc).
2. Recognition of current assets
What is your starting point? You must have an accurate knowledge of the value of your current assets. This includes physical assets such as vehicles, houses or objects, as well as financial assets such as investments, savings and pensions.
3. Definition of financial goals
Financial goals represent where you want to go. You can set short, medium or long term goals. Short-term goals may be a trip or the purchase of an asset. A long-term goal might be financial independence.
4. Learn about investments
Just saving money is usually not enough for financial independence. You have to make money "work for you". This is what is called rentism: getting money from passive income.
There are hundreds of investment options. They generally differ in four respects: time, rate, amount and risk.
- Time is the expected period for that money to give you a return.
- Rate is the amount of such return. It can be fixed (that is, you receive the value regardless of any developments) or variable (the rate is according to the conditions agreed upon at the time of the sale).
- Amount is the money invested. Some investments require larger amounts. Others can be done with small amounts.
- Risk concerns your investor profile. The greater the risk, the greater the possible profits - as well as the losses. If you have a more conservative profile, you can opt for low-risk investments. But, if you want large amounts of income in the short term, you can opt for high-risk investments. The optimal approach is to diversify and have a little of each.
Now that you know your assets, your investor profile and have well-defined goals, the hardest part has arrived: investing. Some experts indicate that the ideal approach is to invest at least 10% of your monthly earnings. For others, this amount can reach 30%.
In financial education, there is a famous 50-15-35 rule, which divides the salary like this:
- 50% for basic expenses, such as rent, food, water and energy bills, supermarket and other essential items;
- 15% for financial priorities, such as paying off debts, building your emergency reserve and making investments;
- 35% for your lifestyle, involving care with your body and mind, such as outings, travel, restaurants and physical activities.
The importance of interest in investments
Interest is the yield from lending money to a person or institution. When you invest, you are, in effect, lending money to a company or institution. This loan is often arranged with the payment of interest. When accrued, interest can increase your investments exponentially. These are called compound interest, or interest on interest.
The difference between simple interest and compound interest
In simple interest, the rate is applied only on the initial amount. In compound interest, it is applied to the amount of the last month (accumulating the effects of previous interest). That is, in the latter case, the amout grows exponentially. This is called interest on interest.
Let's take an example of a loan of R$ 10 thousand, considering a monthly rate of 1%. For simple interest, the amount owed increases R$ 100.00 (1% of R$10,000.00) per month. In 12 months, the total amount will be R$ 11,200.00.
For compound interest, the amount due increases R$ 100 in the first month (1% of R$ 10,000.00), R$ 101 in the second month (1% of R$ 10,100.00), R$ 102.01 in the third month (1% of R$ 10,201.00) and so on. In 12 months, the total amount will be R$ 11,268.25.
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