Financial literacy goes further than being able to calculate a percentage or a return. It is understanding how your finances impact your life. Certified Financial Planner at Alexander Forbes, Rita Cool assists with financial terms for people to understand and achieve financial well-being.
This money is made from doing work, passive income from investments/annuities or obtaining income from other sources. In essence, the more you earn the more you potentially have to spend.
Saving is a safety net where you have money available for emergencies. The most common form of saving is in a bank account, however there are other forms of saving where money gets put aside and could get a positive return, e.g. Tax-Free Savings Account (TFSA). Saving can also be used for short term purchases, for example to replace a fridge when it breaks so you do not have to buy on credit which saves you the interest payments. Or you can save for a short-term goal, such as Umrah.
This is normally done for a longer period and the value of your investment can go up or down, depending on what you have invested in. You can invest in a company privately or invest in shares of a company. You can also make use of a product through a Linked Investment Service Provider. These are companies that invest in a range of assets on your behalf through products like unit trusts, preservation funds, Retirement Annuities or TFSA.
Everyone has expenses and must spend some of what they earn. The trick is how you spend your money. Ask yourself if you have a budget of what needs to happen with your money, or do you spend everything you see in your account?
In most cases you should try to avoid borrowing money, but it can also be beneficial in the correct circumstances. You can borrow money to buy a house that will increase in value over time and that gives you an asset over time. You can also borrow money to buy a company or to expand an existing one.
In all cases you should protect your assets as well as income. You can take out insurance which pays in the event of your asset being stolen or damaged. You can take out life cover to give your family an income in the event of your death or take out disability cover to protect your income if you get sick and cannot work.
A budget is a list of all your fixed and flexible expenses set off against all your income to see if you have enough money to pay for everything each month. If you don’t have enough income you either have to cut your expenses or earn more. Fixed expenses can’t be changed – like a bond or rent, car repayments and school fees. Flexible expenses are things that can change like entertainment and food. Don’t forget haircuts, car registration fees, monthly bank charges or birthday gifts. Remember to budget to pay yourself first by saving for retirement. This should also be a fixed expense. This does not mean treating yourself with gifts but investing in your financial security and financial future.
This is the cost of borrowing money or lending money. If you borrow money you have to pay the lender interest. This can be a fixed rate or linked to the prime rate.
Your debt does not reduce by consolidating it, it increases. If you can work out a debt repayment plan it might be possible to pay your debt sooner and therefore cost you less interest, than if you consolidated your debt.
Our financial experts have been unpacking and providing practical advice on the best ways to preserve your financial freedom. Contact our financial advisors to ensure that you are receiving shariah-compliant finance advice.
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(Source: IOL, 2020)