Are you financially literate? If your financial management strategy is one of the following four, then the answer is probably no.

The most widespread strategy is the one popularised by traders. Thanks to large advertising budgets, sellers publicly insist that it is important to buy continuously. The focus is on buying now, even if you don’t have the financial resources. The idea is to always take advantage of the latest offer, to constantly be in step with the latest purchases—buy now, pay later.

A second strategy is found among moderate people: “Buy products on sale, but within the limit of what you have until the next salary”. The Stoics, pejoratively called the “churlish”, are those who spend almost nothing, illustrating the third strategy, based on putting aside as much as possible. Often the money is kept at home or in a low-yield account. There are no plans for these savings. One last category is that of business people who are constantly looking to earn more, under pressure from the rising spending they have done: “I have to make money to live well”.

Are there more effective approaches that go beyond the pattern of these four? Experts say that if we understand how budgets, debts, investments, and yield work, and we build a sound financial strategy, the answer is “yes”.

Careful monitoring of expenses is the first and most important step towards a sound approach to personal finance. It leads to self-education in the hundreds of ways we spend our money and to using it more efficiently. Purchasing software to record expenses and compile a family budget could be a wise investment.

A second step is to focus on drafting a budget that includes more categories for which we save instead of stockpiling interest instalments. In the case of a mortgage (when it is unavoidable), most of the advice is for the initial purchase of a modest home, which can be decorated with taste, but also with a minimum investment. The principle is that the housing instalments should not exceed the total monthly rent that one could pay without regrets, compared to a safe and predictable long-term family budget.

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financial literacy

The most difficult step, which requires in-depth counselling or information, is investing— allowing the money we saved to work for us, produce a profit, and gradually move us closer to the goal of financial independence (ensuring the essential expenses of the family are covered without depending on salaries). Even if one does not believe that such a goal can be achieved, this is no reason to give up. If the benefit of the investment can be met at some point to cover even a percentage of the monthly expenses required, this is certainly a gain.

Norel Iacob is the Editor-in-Chief of Signs of the Times Romania and ST Network.