Five pillars of financial literacy you can master (2024)

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.

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 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.

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

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.

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

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 circ*mstances."

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

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.

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.

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."

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.

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 circ*mstances.