Financial Education: Key to Building Strong and Prosperous Societies

Bogotá — Without a doubt, financial education and savings are not only key to ensuring stability of people, but also play a crucial role in building strong and prosperous societies.

In Colombia, this subject is very challenging, as revealed by the Development Bank of Latin America (CAF), which in its financial education index Colombia obtains 12.5 points out of a maximum of 21.

Concepts such as savings, investment, debt, financial planning, expenses, costs, budget, among others, still remain unknown to many and it is important to understand and integrate them so that they are become pillars that help make informed decisions and thus avoid practices that are harmful to our financial health.

What do we have to take into account if we want to achieve a state of financial well-being?

Budget and Planning.

The foundation of any solid financial strategy is a well-put together budget. Financial education teaches people to record their income and expenses, allowing them to identify what they are spending on and spot areas where they can save.

This may include, for example, reducing unnecessary expenses or eliminating high-interest debt. If you don’t have a budget, good personal finance practice is to follow the 50/30/20 rule to understand how our money could be allocated: a. 50% of income will go to fixed expenses (rent, debts, fees, services). b. 30% goes to variable expenses (food, transportation, leisure, outings) c. 20% should be allocated to savings (separate it before the beginning of the month).

Savings as a priority

Financial education teaches us to make saving a priority in everyday life. It is emphasized that savings are not simply the money left after spending, but a planned portion of income that is saved for future expenses.

This may take the form of a fund of emergency, saving for short-term goals (like a vacation), and saving for long-term goals (like retirement).

Another good practice is automating savings, which means setting up automatic transfers to separate savings as soon as an income arrives.

Deal with debt

To deal with debt, it is essential to understand how to manage it effectively. This involves developing strategies to pay off debts with high interest rates first.such as those associated with credit cards and avoid accumulating unnecessary debts.

According to DANE, in 2020, approximately 45.6% of Colombian households had some type of debt. Of these indebted households, around 38.3% resorted to banking services to extend payment times, with interest rates that may vary depending on the financial institution; In general, acceptable rates can range between 3% and 6%.

It is important to keep in mind that the current situation of the country, marked by the decrease in economic activity, low investment and the fall in production, can also influence the ability to pay household debts.

Investments and Asset Growth

Financial education is not just about about saving money, but about understanding all the resources we have to get closer to our financial goals.

This involves becoming familiar with the instruments available for investing; such as stocks, bonds, real estate or cryptocurrencies, understanding the risks and benefits associated with each of them.

“For those who are just beginning to enter the world When it comes to investments, it is important to be clear about the financial objectives, the deadline, and above all, the risk that you are willing to assume. Without that being clear, we are likely to make incorrect decisions,” says Alex Robbio, CEO of GLIM.

Asset Diversification

A good practice in finance in general, which also applies to personal finances, is the concept of asset diversification. to reduce the risk. One way to diversify risk is by leaving the local market, through the purchase of foreign currency.

The US dollar, for example, is widely considered a safe haven currency in international financial markets.