What is Financial Literacy & Why it is Important

Financial Literacy Basics

For many, finance can be incredibly intimidating; the world of finance is full of complicated terms and confusing concepts that seem to require an advanced mathematics degree or a Master’s.

Thankfully, this is actually a misconception, and you can achieve financial literacy. So, here we’ll explore financial literacy and why you should consider it important in your everyday life.

When you want to do something basic such as open a new savings account or get a debit card, it can be hard to imagine why you need to know more. After all, that is why you’re paying your banking fees, isn’t it? However, financial literacy is more than learning a few new terms to impress your friends; it involves having a grasp of your money matters.

In simple terms, financial literacy means that you have a basic understanding of your money. This can make the difference between struggling to live from one paycheck to the next and planning for large purchases in the future or achieving your financial goals. If you’re sick of struggling to make ends meet, then becoming financially literate should be one of your main priorities.

There are four main areas of financial literacy, which work together to help you to take control of your finances and start working towards short and long term financial stability.

Here we’ll look into each of these areas in more detail, so you can gain an understanding of why they are so crucial to your everyday life.

Debt

According to Debt.org, consumer debt has reached $14 trillion, and it has increased over the last 20 consecutive quarters. There are four main areas for debt; home, credit cards, student loans, and auto debt. Many of us have debt in at least one of these areas, and it can impact our ability to change home, upgrade vehicles, or even get a debit card.

In simple terms, debt is the money that you spend that isn’t actually yours. So, when you take out a vehicle loan, borrow money from your bank, or even use a credit card, you’re accumulating debt. Unless you’re independently wealthy, it is inevitable that debt is considered necessary as you will need help to buy a car or home or fund your education.

However, part of being financially literate is understanding the difference between bad debt and good debt. Good debt is considered to be money borrowed for absolute necessities, while bad debt is for things you don’t really need. So, while buying a home is considered good debt, eating out in a fancy restaurant on your credit card is bad debt.

One of the most important aspects of financial literacy is distinguishing between what is your good debt and the bad debt that should be avoided.

Savings

If you have a modest income, savings may seem like a pipe-dream, but they are a fundamental part of financial literacy. Even if you are only able to save $20 a month, it can create a buffer to cover unexpected expenses or start to plan for the future. A healthy long term financial future requires savings, which is why it is crucial for financial literacy to understand your saving options.

Visit any bank or credit union, and you’ll see a variety of savings products that can be divided into two basic categories:

• Instant Access: This type of savings account provides a lower rate of interest, but there are no penalties for taking out your money as and when you need it. This type of account is ideal for receiving a monthly or weekly transfer from your current account after you get paid. If you get into the habit of putting a little away from each paycheck, it will become second nature, and you can accumulate a nice little nest egg.
• Deposit: This type of account is often tied to a specific time period; for example, you may need to tie your money up for a year or provide 90 days’ notice to make a withdrawal. This can be a good longer term savings account, where you’ll not be tempted to touch the money.

Budgeting

This is a catch all term for planning and managing money. It is only by understanding where your money is going each month you will be able to create a plan to spend less and save for the things that you want.

Many people feel a little overwhelmed by the prospect of creating a budget, but it can be accomplished in some basic steps. There are even some great budgeting apps that can make the process easier.

In simple terms, you need to ensure that your income is greater than your expenses. This may involve cutting excessive spending and unnecessary expenses, but ideally, you should create a gap in your income and spending to put money away in your savings account.

When you create a budget, it can help you to plan for all of your short, medium, and long term costs, so you can save to afford all three.

Investing

The final area to achieve financial literacy is investing. This is all about growing wealth to enjoy a financially secure future. According to Statista, 55% of Americans have invested in the stock market, but this is not the only way to invest for your future. There are different types of investment options that may be better suited to your circumstances and financial goals, such as property, bonds, and stocks.

The value of your investment can grow to create a second income or provide funds for your long term future plans.

So, Why is Financial Literacy Important?

Financial literacy will help you to build wealth, achieve your financial goals, protect yourself and your family in an emergency, and plan for your future. When you achieve financial literacy, you can reduce or eliminate your money stress, so you can concentrate your time on the more important things in life.

If you currently live from paycheck to paycheck with no savings, it is time that you become financially literate. Once you master all four areas of financial literacy, you can start to enjoy the things that you like without needing to become overwhelmed by debt.