A common misconception about financial literacy is that it’s only for business owners but knowing how to correctly manage your money and putting in the time to improve your financial knowledge is key to your long-term financial success.

Our Wealth Management specialists have put together a beginner’s guide for business owners, entrepreneurs and professionals to help you get started.

What is financial literacy?

To be financially literate is to know how to manage your money. This means learning how to pay your bills, borrow and save money responsibility and how and why to invest and plan for retirement.

Financial literacy is not a new concept, however, only now are people starting to realise its importance. According to research from the University of Newcastle in 2022, more than a third of Australians are financially illiterate. This research also shows that financial literacy significantly impacts a person’s general well-being. 1 Of course financial literacy isn’t just for business owners or entrepreneurs, but for anyone wanting to achieve financial success/freedom.

Why financial literacy is important?

They don’t teach you in school how to effectively manage your money, it’s kind of something you teach yourself as you go along. With rising living costs and high-interest rates, learning financial literacy is more important than ever especially since the money issues people face later in life are mainly due to a lack of basic financial literacy. 1

Want to buy a house, invest in crypto, passively increase your income, ask for a big pay rise and need the data to support you? To achieve this, you need a basic level of financial literacy. Learning financial literacy doesn’t need to be difficult, and you don’t need to be an expert. Even if you’re from a non-financial background, learning the basics will help you greatly.

Personal finance basics

Personal finance is all about learning how to correctly manage your money. This includes saving, investing and setting financial goals. Here are just a few other areas to consider.

How to do a budget

Handling your finances the right way should be a priority and it should drive your daily spending and saving choices. Managing your money correctly means paying attention to your spending and making sure you don’t live beyond your financial means.

Start off by looking at your monthly income and expenses on average and break down your spending into categories that include basic needs (e.g., rent, utilities, groceries, health insurance, car insurance etc) and flexible spending (shopping, travel, restaurant dining etc). Once you have a handle on where your money is going, it’ll be easier for you to go through your budget and look for ways to cut down on spending.

To help you get started, make sure you:

  • Record your income
  • Add up your expenses (fixed, debt, unexpected)
  • Set a spending limit
  • Set a savings goal
  • Look at your flexible spending and adjust your budget
  • Different bank accounts for different purposes (bills and expenses, spending, savings)
  • Be realistic and reward yourself every now and then 2

The importance of setting up an emergency fund

You can’t predict when your car will break down or when you’ll have to make an emergency trip to the hospital. If you don’t have the money saved up, it can mess with the budget you’ve worked so hard to build and stick to.

An emergency fund doesn’t have to be hefty but just something to help you get through a rainy day. MoneySmart recommends having three months’ worth of expenses in your emergency fund. It’s also a good idea to choose an account where the money can earn interest but is still easily assessable should you need it.

Pay your bills on time

This may seem like a straightforward one but overdue payments can affect your credit score which affects you later in life. Keep on track of when your bills are due and have a savings plan in place so that when you get that letter saying your bill is due in one month, instead of forking out that money you’ve already got that amount saved up.

Where possible see if you can set up auto payments and reminders so that there’s no chance of you missing a bill.

Investments and retirement planning

Investing involves purchasing assets (usually real estate property, stocks or bonds) to earn a return on the money invested. Investing helps you grow your individual wealth and if done right, you should make more than you spent. 3 Investing comes with risk, especially for those that are unfamiliar with it. It pays to educate yourself on the basics and seek professional help to stop you from getting in over your head.

You may be thinking you’re too young for retirement or you need your money for things now but if you want to live comfortably after you stop working, you should consider how you can passively grow your wealth.

Get the right insurance

Insurance plans give you peace of mind knowing that if something happens, your savings won’t be affected.

Your insurance policies will depend on what your needs are. You’ll need to assess the financial risks you face and then look into which plans mitigate these risks. Here are a few things to get you started:

  • Car insurance
  • Homeowner’s or renter’s insurance
  • Health insurance
  • Life insurance
  • Long-term care insurance

If you’re feeling stuck on how to get the most out of your plans, speak to a financial adviser. We know how hard you’ve worked to grow your wealth so our financial planning experts are to help you protect that wealth.

Learning how credit cards and interest rates work

Not everyone gets a credit card when they turn 18 but if you decide you want one later, it helps to know how to be responsible with your credit. A credit card is a huge commitment and when you have one at your disposal, it can be tempting to charge more than you can afford. Only borrow what you can repay and pay off your credit cards each month. If you continue to carry over the balance, you could end up paying more interest than on the original purchase itself.

If you’re not able to pay off your cards completely each month, still try and pay over the minimum. Any payment is better than no payment.

Purchasing property

Many people dream of owning their own home but with rising home prices, underemployment and student loan debt, we’re seeing more and more people putting off this dream.

The home-buying process can seem daunting but if you’re prepared from the beginning, this will relieve some of your stress. If you’re looking to get started on your home-buying journey, read our checklist for prospective first-home buyers.

Business finance basics

Whether you’ve just started running your own business or you’re an established business owner, it helps to know the basics when it comes to your business finances. While you can hire experts to help you, financial literacy allows you to be more actively involved in your business and to understand where your money is coming from and going.

Particularly for businesses, financial literacy helps you better manage your cash flow, understand taxation and make sense of your financial statements.

Goal setting

If you struggle to set achievable goals, then you’re not alone. Often you know exactly what you want (to grow your business, higher profits, more leads) but you struggle to meet your goals.

If you want to make your business the best it can be, you must create obtainable goals and hold yourself (and your team) accountable. Goals help create a clear path for you and your business and without them you have no way of monitoring your company’s progress.

All goals are important, no matter how big or small they are. Here are some tips to help you get started:

  • Determine what you want your goals to be – think about your overall business plan and what you want to accomplish.
  • Be as specific as possible (it helps to have SMART goals)
  • Commit to these goals
  • Meet regularly with your team to measure progress
  • Hold yourself accountable with deadlines
  • Celebrate milestones and achievements 4

Business planning and structuring

There is a direct relationship between business/financial success and financial literacy. If you’re to grow your business and make smarter business decisions, the first step is to understand how these business decisions will impact your business.

Asking the right questions from the start of your business journey is important as it shapes the path you’ll be taking but if you’ve been established for a while and your business plan doesn’t reflect your priorities or goals, it’s probably time to review and update. If you’re stuck on how to update your business plan, your accountant will be able to help you and make sure the objectives outlined reflect your overall vision.

Managing cash flow

Being able to efficiently manage your cash flow is key to the long-term survival of your business. It will also allow you to maintain enough working capital to operate through quiet periods.

On top of understanding your cash flow statement, here are some other helpful tips.

  • Plan and monitor your cash flow (look at your cash flow forecast)
  • Monitor stock levels
  • Improve your accounts receivable process
  • Look at ways to reduce your outgoings
  • Use technology (and experts) to help you

Analysing your financial statements

Business owners, entrepreneurs and professionals alike are more likely to grow their business when the decisions they make are based on accurate financial information. Financial statements such as your profit and loss statement, cash flow statement and balance sheet depict the performance of your business over a period of time. Even if you only know the basics, this will still allow you to make smarter business decisions for your organisation.

Through your financials, you can see the factors affecting your profitability and make the necessary changes to increase your revenue. By analysing your profit and loss statement, you can accurately calculate the amount of tax. Your cash flow statement provides a detailed picture of the cash flowing in and out of your business. Having this forecast makes it easier for you to plan and ensure you have enough capital to grow your business. 5

Besides the cash flow statement and profit and loss statement, you also have your balance sheet which helps you understand the overall financial health of your business. 5

Succession planning or exit planning

People often use the terms succession planning and exit planning interchangeably, but they mean two different things, and as a business owner, it’s essential to know the difference.

  • Succession planning refers to identifying, training, and transferring the leadership/management of a company to another person or team of people.
  • Exit planning refers to identifying and executing the transfer strategy of a company and its ownership to another person, team, or entity. 6

Handling your taxes

As a business owner, handling your taxes is part of the job. There are several obligations from the ATO that you need to follow and if you want to play an active role in your planning strategies, it helps if you understand what your tax situation is.

We don’t expect you to be tax experts and when you work with an accountant, it doesn’t matter what you don’t know because their role as your accountant is to help you but being financially literate will make it easier on you and provide greater transparency into your business.

Leadership and negotiating skills

Financial literacy can also help you improve your leadership and negotiating skills. If you understand how finance works then you’ll understand the bigger picture whether that be in relation to stocks, materials or your employee’s salaries.

Want to improve your financial literacy but don’t know where to start?

Building your financial literacy is like learning a language, it’s a critical business skill. It involves having knowledge of financial terminologies, theories, concepts, practices, and statements. All these elements help you understand both your personal and business finances and the factors involved in affecting your wealth.

Important to note that of course you’re not going to know everything, and you shouldn’t be an expert in everything. Which is where we come in. Just like you would reach out to a lawyer if you had legal issues, a financial adviser is here to help you achieve financial success, both professionally and personally. Contact us today to see how we can help.

1 Greater financial literacy leads to greater life satisfaction, the University of Newcastle
2 How to do a budget, MoneySmart
3 Investing Explained: Types of Investments and How to Get Started, Investopedia
4 Become A Pro At Setting Business Goals In The New Year With These 6 Tips, Forbes
5 Small Business Financial Literacy: The Beginner’s Guide, Guidant
6 Succession Planning vs. Exit Planning Which Do you Use? Your Small Business Growth
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