As children, we were taught that we needed to study the topics of reading, writing and arithmetic if we wanted to do well in school. Similarly, if you want to be financially successful, you have to make an effort to learn the essential principles of dealing with money.

Wikipedia.org defines financial literacy as the “set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.” There are three keys to being financially smart — you have to know how to manage, multiply and maintain your money.

Get basic money skills
The important skill sets to learn in managing money are: how to budget to know the cost of your lifestyle and to prioritise your spending; how to develop the discipline of saving; how to manage useful debt and eliminate wasteful borrowing; and how to set and achieve your financial goals.

You also need to expand your money-making skills — you need to know how to create independent income outside of your job, and how to invest your money wisely. If you want to be very wealthy, you also have to learn how to create business systems and passive income sources.

Maintaining your money throughout your lifetime is also vital — you need to manage personal and investing risks to your money; you need to have a source of income when you retire; and you must make plans to pass on your estate. Above all, you must understand the true purpose of money.

Carry out the learning process
Today, I have little or no recollection of some of the subjects which I had passed with high marks in school many years ago. Although I thought I had mastered them, I had remembered only enough to answer the exam questions; it seems I had not truly assimilated the material for the long-term.

In the same way, simply researching information about money is not enough to properly retain these important financial lessons. Like any other subject in school, you have to progress through the complete hierarchy of learning outcomes to receive the maximum benefit.

You should first gain enough knowledge to recall what you learnt, and then fully comprehend all the material. Application, where you can relate the information to your situation, is next. You have truly succeeded when you can analyse, create solutions and evaluate the results of your learning.

Put your knowledge to work
Let’s look at the process of getting skilled at budgeting. After researching the right way to make a budget, you should know the procedure of listing all your spending items over the course of a year, and understand why it’s important to work out the average monthly costs of your annual expenses.

Then, you should apply what you learn by writing down your expenses and income, and calculating your shortfall or surplus. Analyse your budget to see where you can cut back on non-essential items or determine the amount of extra money you need to earn to meet all your requirements.

When you have really absorbed the budgeting process, you’ll be able to create your own budgets for school costs, business, or even keeping track of daily spending. Finally, you will be able to use your budget as support to make smart decisions about saving, borrowing or planning for money goals.

Check your results
Confucius wisely declared that “I hear and I forget; I see and I remember; I do and I understand.” To get the most from your educational efforts, it’s best to immediately put what you have learnt into practice, and to continue using your new-found skills until they become habitual.

Unlike your school days, your financial life has no course work or examinations to help you to judge your progress in attaining knowledge. The true test of your educational efforts will be how effectively you make use of what you have gained to improve your financial situation.

Even if you know intellectually what to do, once your results are less than desirable, then it means you have not fully learnt your lessons. If you are still struggling financially despite the fact that you know better, then it could mean that you need to get more advanced money training.

Become money-wise
The reality is that being financially smart is not the same as being financially wise. If you’re smart, it simply means that you know all the right things to do. When you’re wise, you always exercise proper judgement to make appropriate decisions; you always do the right things with money, all the time.

The process of becoming wise may take a much longer time than is needed to gain the basic financial facts of life. For some people, wisdom is best gained through their experiences; and their negative money occurrences might prove to be their finest teachers.

If your financial past holds many disappointments and regrets, make the best of the lessons that your experiences can teach you. Recognise where you went wrong, research the correct skills to adopt, and resolve to act wisely always with money in the future.

Copyright © 2013 Cherryl Hanson Simpson. No reproduction without written consent.

Originally published in The Daily Observer, May 16, 2013

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Cherryl is a money coach and business mentor, and founder of Financially S.M.A.R.T. Services. See more of her work at www.entrepreneursinjamaica.com and www.financiallysmart.org. Contact Cherryl