Financial literacy has rather become a hackneyed term today, with primary reference to just having [extra] money in the pocket. Financial literacy is not limited to just knowing how to source money and satisfying basic needs; it goes beyond that. Lack of financial knowledge has led many individuals and companies into troubled waters because they are unable to make wholesome decisions that will enable them to take positive actions that will guide and secure their future. Financial literacy is the key to financial freedom. Hence, the focus of this article will be to explain and analyze the importance and benefits that come with financial literacy. Let’s see ‘Financial Literacy Means Knowing How To Make Financial Decisions’.
Meaning
The term “financial literacy” might appear to be intimidating and complex, but it is not. Everyone possesses some level of knowledge, but having an adequate one is the focus here. However, certain keywords can help in quickly understanding it, although only a fraction. Keywords like debt, investing, credit, budgeting, and personal finance can give a clue as to what financial literacy entails. Financial literacy, in simple terms, refers to possessing the required financial knowledge and skills to help in understanding one’s financial situation and how that can have an impact on one, either positively or negatively, by the financial decisions one makes. Financial literacy serves as a guide to knowing how to make informed and prompt decisions that will keep one in good financial standing, either through having cash or assets. If a person is not able to understand his financial position and how to take actions that will keep him in good stead, then such a person could be described as having little financial knowledge.
Understanding financial literacy
Already, the meaning of financial literacy has been addressed above. However, having a good understanding is another. Financial literacy is not limited to individuals; it also includes businesses, whether small or large, as well as the government. Financial literacy is more than just having the knowledge and skills; experience counts as well. Experience in financial dealings will prove how knowledgeable one is in financial matters. But before experience can be had, some important requirements to have would be knowing key financial principles and concepts such as debt management, investment strategies, financial planning, compound interest, and more. Financial illiteracy can lead to poor financial choices and decisions and can lead to hurting one’s financial stability. It is the door to penury. Hence, getting educated on financial matters is not reserved for the smart or affluent ones; everyone requires it, and it must be a continuous education.
Various steps have been given on the steps that can be taken to have and improve one’s financial literacy. They include:
- Devising strategies to pay off debt.
- Planning for retirement early.
- Learning skills to create a budget.
- Learning how to track expenses.
- Learning how to save excellently.
- Seeking investment opportunities.
Financial literacy is not a straightjacket that can be applied across the board; it varies with education and income levels. Research reports have it that highly educated consumers with high incomes can be just as illiterate in financial matters as less-educated and lower-income consumers.
Importance
The average individual is not bothered about acquiring financial knowledge until the harsh reality of penury strikes or economic problems in the country. The global recession and wave of lockdown during the global pandemic—COVID-19 that occurred a few years ago caught many people off guard because many had not adequately prepared for the unexpected economic breakdown. Those who had good financial knowledge and skills did not need to know the exact time the economy was going to break down, but having secured themselves through the acquisition of assets that would serve as a prop to sustain them during economic blackouts, were able to navigate their way through the hardship.
Financially ignorant people tend to think of having money and spending it on extravagant things. That is, they tend to go for more possessions that are liabilities over assets, and in their quest to try to maintain these possessions of theirs consisting mainly of liabilities, they further plunge into more financial troubles. The difference between the financially ignorant and the financially knowledgeable is that the latter possesses the knowledge and skills, while the former has minimal knowledge and is unable to sustain himself.
One of the reasons why financial literacy is important is that financial responsibility is increasing. Many people have lots of things involving money to contend with, like:
- Planning for retirement.
- Mortgage debt
- Student loans
- Online trading accounts
- Profit-making in businesses, among others.
Benefits of Financial Literacy
The benefits of being financially literate are numerous, and as a matter of fact, financial literacy is continuous and not a one-stop action. Also, there is no limit to the amount of knowledge one can get from being financially educated. The biggest benefit of being financially literate is that one is better prepared for the future. To further expound on that, other benefits are hereby listed:
- They are less vulnerable to fraud considering they are aware of their financial standing and know-how or what to channel their financial resources to.
- Less financial stress
- Effective money and debt management.
- Reduction in incurring unnecessary expenses through regulation.
- Assists in creating a planned budget.
- It helps in good decision-making like knowing areas to invest in.
- Capable of achieving financial objectives
The benefits of financial literacy cannot be downplayed. As a result, one must acquire financial knowledge and skills that will ensure good financial standing, reduce anxiety, and stimulate the achievement of the financial target(s).
Conclusion
Financial literacy is becoming increasingly important in today’s world as dynamics in finances and the economy are fluid. Unlikely events like COVID-19 gave exposure to how ill-prepared and illiterate most people are with financial issues. It is without a doubt that everyone needs to continuously strive to attain more financial education to keep up with the pace of the changing world to be able to survive.
