Article

Five pillars of financial literacy you can master

27 April 2023

5-minute read

Plan Well Feature Save and invest

Financial literacy empowers you to make sound money decisions. (Credit: Shutterstock)

Money influences people's daily decisions in life, from where they live to what they eat. Yet, many still need to level up their financial literacy skills to make informed financial decisions.

"Asia is known holistically for being great at saving," shares finance expert Lachlan Campbell in AIA Voices. "But money management – actually budgeting and planning for short, medium and long-term goals – is a problem."

Understanding financial literacy's five pillars allows greater control over finances. Here's how to set yourself on a path to financial security.

Financial literacy fundamentals

Financial literacy involves effective management of income, assets and debt. It requires maintaining a budget, paying obligations on time and putting savings to work. Most importantly, financial wellness entails safeguarding against unforeseen financial challenges.

Here's a look at how having a strong command of financial literacy fundamentals empowers you to lead a prosperous life.

1. Budgeting

Start with creating a budget aligned with your financial goals. Tracking your expenses and savings helps you see how to gain greater control over your finances.

The Central Provident Fund (CPF) of Singapore suggests the 50/30/20 rule for creating a budget.

50 per cent of your income should go to necessities, like household bills and groceries
30 per cent may be for your own discretionary spending, like a gym membership
20 per cent goes to savings

2. Saving

A good grasp of financial literacy fundamentals makes you an effective money manager. (Credit: Shutterstock)

Budgeting can be tough for some people, especially those with limited funds. However, AIA Voices finance expert, Anna Haotanto, the founder of The New Savvy website, says a low income shouldn't be an obstacle to budgeting.

"A lot of people are paralysed because they think they need a large sum," she says. "Start small and start early."

Paula Pant, founder of the Afford Anything podcast, recommends increasing savings by at least one per cent annually to ensure growth.

Financial experts recommend at least 10 per cent of your income should go to your retirement income. Another 10 per cent goes to an emergency fund and for long-term financial goals.

Campbell advises, "Always have at least three, if not six, months' worth of emergency funds. This covers food, shelter, transportation, medicine and clothing."

3. Risk management

Taking a proactive approach to financial planning, such as investing in insurance, can offer a sense of security and can help mitigate the impact of less desirable events.

Even in your 20s and 30s, Haotanto shares, "You need to protect your downside. You have to make sure you're insured for any unfortunate circumstances."

For maximum benefit, invest savings in life insurance that provides annual yields. AIA, for example, offers a portfolio of savings products that promise different annual yields, principals and maturity dates depending on your preference and requirements.

No matter the market condition, AIA ensures the capital is returned 100 per cent by the end of the policy term.

4. Borrowing

Borrowing can help your financial standing. However, take extra care in understanding your loan structure's details, from interest rates to repayment. (Credit: Shutterstock)

Financial literacy provides the skills to manage debt and pay obligations on time. Sticking to a budget is one good way to stay out of debt. But sometimes, a loan is necessary to acquire a significant asset, like a home.

CPF suggests maintaining a 25 to 30 per cent debt-to-income (DTI) ratio when applying for a loan. DTI is the portion of income that should go towards monthly debt obligations. Lenders look at DTI to check one's ability to repay the money borrowed.

Calculate your DTI by adding all monthly debt payments (like mortgage, car and student loan) and dividing the sum by gross monthly income (before taxes and other deductions).

CPF says the total DTI should be set at a maximum of 55 per cent. "This ensures you avoid overtaxing yourself in managing your debt obligations," the organisation adds.

5. Investing

Once protection has been set up to manage risks, look at how to grow your wealth via investments, Haotanto says.

Pant, the author of Afford Anything, says financial literacy aims to keep the gap between income and spending as wide as possible. This means spending less than you earn, allowing you to have the capital for investments.

CPF recommends that you determine your risk tolerance and investment horizon before investing. This way, you can better identify which financial products suit your needs and lifestyle. You can also work with your financial advisor on how much your income should be invested.

Empowered to make financial choices

Mastering financial literacy fundamentals creates the roadmap to achieve your life goals in the next 15 to 20 years.

"Money is part of having a clear life vision and plan," Campbell says. "Where do you want to go in your life? What do you want in your life, and why do you want it? Most people don't have a plan."

Financial confidence comes from understanding how budgeting, saving, investing, risk and debt management work. These pillars develop good money habits and build a strong foundation for a stable future.

When it comes to financial literacy, Haotanto says, "The most important thing to remember is that being empowered in your personal finances is giving yourself a choice. It's not a choice to be rich or reckless, but to actually have a choice to live the kind of life you want.

Having the choice to live the kind of life you want starts with a strong financial foundation. In this episode of AIA Voices, finance expert Anna Haotanto shares the six steps towards financial success.

AIA Voices is a community of influential and educational voices from around Asia to talk about life, health and wellness. A platform to educate, motivate and inspire people to make positive behavioural changes on their health and wellness journey. Providing an opportunity for communities across Asia to connect, collaborate, and learn from each other. Designed to drive AIA One Billion, our ambition to engage a billion people to live Healthier, Longer, Better Lives by 2030.

References:

OECD. 2018. Financial Inclusion and Consumer Empowerment in Southeast Asia. [online] [Accessed on December 11, 2022]

Journal of Education and Practice. 2015. Financial Literacy as the Foundation for Individual Financial Behavior [online] [Accessed on December 11, 2022]

Challenge Magazine. 2022. Financial Literacy In A Time Of Digitalisation [online] [Accessed on December 11, 2022]

Central Provident Fund Board. 2020. 8 essential budgeting tips for young adults [online] [Accessed on [Accessed on December 11, 2022]

Moneysense. 2022. Financial Planning Is For Everyone [online] [Accessed on [Accessed on December 11, 2022]

Big Think. 2022. The most powerful way to think about money | Paula Pant [online] [Accessed on [Accessed on December 11, 2022]

The Money Guy Show. 2022. Financial Planning 101 (By Age) - The Complete Guide to Winning Financially [online] [Accessed on [Accessed on December 11, 2022]

Disclaimer:

This is general information only and is not intended as financial, medical, health, nutritional or other advice. You should obtain professional advice from a financial adviser, or medical or health practitioner in relation to your own personal circumstances.