Financial literacy for life

by Koh Cheng Hwee 04:45 AM Sep 03, 2011

Financial literacy is the ability to understand and manage one's finances. Essentially, it is the set of skills and knowledge that allows you to make informed and effective decisions about your finances, be it day-to-day budgeting, saving, protecting or growing your wealth.

People often think that financial literacy is only applicable when one has started working. In fact, it is applicable to all stages of our life, from youth to retirement years.


Laying the foundation

Parents can give children a head start by helping them understand the value of money and the importance of savings. When children are mature enough to appreciate the complexities of investment, parents can involve them by letting them have a small stake in their investments.

Parents can also invest on their children's behalf early on and use the investment to demonstrate how the investment amount, horizon and time value of money should reflect one's financial goal.


Young adults need discipline

A lack of discipline in savings is an issue that many young adults face. They have the tendency to succumb to peer pressure and indulge in expensive exploits. It is important to instill financial literacy as young adults who control their spending from young tend to achieve their accumulation goal much earlier than those who spent indulgently.

Young adults should set clear financial goals and be disciplined in working towards that. Those who have difficulties controlling their spending can consider having different accounts for saving and transactional needs. They can also consider a debit card that will minimise overspending while giving them access to benefits typically accorded to credit cardholders.

Young adults can also take advantage of the various finance related workshops available to learn how to manage their finances properly.

Investments for working adults

Established adults should consider protecting and growing their wealth, especially for parents with dependent children, to ensure that they and their families' needs will be taken care of whatever the circumstances, and perhaps even leave something substantial behind for the next generation.

Ideally, working adults should save 15 to 35 per cent of their monthly income. After accumulating savings amounting to six months of expenses, they can explore ways to invest the savings to generate higher returns. There are many books and workshops where investors can learn about the various financial products. Prior to trading, they should also take advantage of the trial period that the various trading platforms offer to gain some hands-on experience.

When looking at various investment solutions, one should pay attention to the risks and returns. Younger investors may get carried away and not recognise that higher rate of returns are usually accompanied by a higher level of risk. Instead of looking at portfolios based on individual merits, young investors should look at how investing in a new investment product can help enhance the risk/return ratio of the overall portfolio.

It is important to have a diversified portfolio based on the three main asset classes (fixed income, equity and cash) and different sectors. It is also important to invest in asset classes that are not highly correlated for greater portfolio diversification.


Don't stop at retirement

While seniors will focus on wealth protection rather than accumulation, they need to make informed decisions about their various assets such as houses and ensuring they are sufficiently covered for living and healthcare expenses. Seniors may also wish to place their monies with less volatile vehicles such as fixed deposits.