Financial literacy is the integration of financial, credit, and debt management information required to make financially responsible decisions that are essential in our daily lives. Understanding how a bank account works, what it means to use a credit card, and how to avoid debt are all instances of financial literacy. It has a tangible influence on people as they attempt to manage their budgets, purchase a home, support their children's education, and save for retirement.
What is finance?
To understand exactly what financial literacy is, one must first understand what finance means. Finance is the administration, development, and study of money and investments. It specifically addresses the issues of how a person, organisation, or government obtains money – referred to as capital in the world of business – and how that money is spent or invested. Finance is ultimately subdivided into personal finance, corporate finance, and public finance. This article will focus exclusively on the point of personal finance and what is the importance of financial literacy.
What is personal finance?
Personal finance is the financial management utilised by an individual or a family unit to budget, save, and spend money over time while taking various financial risks and future life events into consideration. When planning their personal finances, individuals would take into consideration a huge variety of financial products and services, such as:
·Banking products - checking, savings accounts, credit cards, and consumer loans
·Investments - companies' shares, bonds, mutual funds
·Insurance - life insurance, health insurance, disability insurance
·Others - employer-sponsored retirement plans, social security benefits, income tax management
Personal situations differ substantially in terms of income, wealth, and spending needs. Tax and finance policy differs in every country, and market circumstances do shift over time. As a result, advice given to one individual may not be appropriate to another. A financial adviser can provide specialised guidance. However, there are a few general tips that can be followed for beginners:
·Pay off your credit cards in full every month
·20% of income goes into savings
·Establish an emergency fund
·Maximize contributions to tax advantaged funds such as retirement funds
·Look for low-cost, diversified mutual funds that have a balance of risk and reward
***These are just general tips, for more specific financial advice, it is best to seek out financial experts.
What is the importance of financial literacy?
The purpose of financial literacy is to assist people better grasp fundamental finances so that they can handle their money more effectively. There is a variety of information accessible to help educate people on their financial status, and there are various topics to cover such as saving, investing, debt, budgeting, and so on. Even learning a couple of these topics can help achieve economic and financial stability over time. This is especially important as the world’s economy is recovering from the COVID-19 situation, individuals that are financially literate may be better able to manage their money, especially under challenging circumstances. Financial literacy, as demonstrated by financial attitudes and behaviour, is crucial to the general public's financial well-being. Financial illiteracy can have an impact on you today and in the future. Acquiring enormous debts, taking out loans with exorbitant interest rates, and having a bad influence on your credit score are all repercussions of not understanding your alternatives or having access to credible information on these matters. Some ways being financially literate can positively impact your life are:
1. Improves an individual’s ability to make financial judgments.
People are more inclined to rely on others to make financial decisions for them when they are uninformed of all their possibilities. When it comes to major financial decisions, understanding all alternatives provides an individual the confidence to do what's best for themselves.
2. Gives an individual the power to negotiate
Individuals can successfully convey their expectations when they are financially literate. An individual’s capacity to bargain for their best choice will increase significantly as their financial knowledge improves, from negotiating reduced interest rates on borrowed cash to outlining investing objectives.
3. Improves one’s ability to protect themselves.
With identity theft and internet fraud on the rise, financial literacy will prepare an individual to defend themselves against online frauds.
4. Increases chances of achieving goals.
It's one thing to have financial goals. Having a better understanding of what it takes to reach those objectives, on the other hand, might mean the difference to making one’s financial dreams becoming a reality.
5. A better overall quality of life.
When an individual understands their finances, they are less likely to be stressed and achieve more.
Should financial literacy education be taught in schools?
It is critical to educate and empower the next generation on proper financial management. A student who obtains financial education does more than simply make wise financial decisions. They instil healthy behaviours in their families, communities, and, eventually, the country. By altering the current toxic financial culture, a new normal can be instilled in future generations. Financial literacy education in schools is a must. Financial literacy should be taught in schools for a variety of reasons, both immediate and long-term. The core idea is that if even one person fails to master these fundamentally important life skills, the unintended effects might be as severe as eternal poverty for future generations. Thus, teaching students what is financial knowledge and what is the importance of financial literacy at beginner levels in schools are undoubtedly essential.
Any advancement in financial literacy will have a significant influence on people's capacity to provide for their future, even more so in recent times. Being financially literate is not simple, but once learned, it may significantly reduce the burdens of life. Learn more ways to be financially secure in our blog.