What Is Financial Literacy?
At some point in your life, you have probably come across financial advisors or other people who claim to profess knowledge and skills in money matters. These are people who can advise you on various aspects of your finances.
Some of these include:
- how to increase your income streams
- how to save your money
- where and how to invest your savings and
- various other aspects of money
In lay terms, we can term such people to be financially literate. But does that mean that everyone else is clueless when it comes to money management? Absolutely not. Even without the requisite training in financial management, you can emerge as one of the most financially-literate people the world has ever known.
Consumer Debt Statistics
80
38
72
Financial literacy refers to the general understanding on matters that pertain to money, in a sense that your knowledge contributes to the betterment of your personal life as well as the life of the world around you. But in order to inculcate financial literacy, you need to make certain behavioral adjustments to your personal life. Of course, before making such changes, you need to begin easy by fully understanding what money is. You can only spend and save wisely when you understand the nitty gritty of money.
Also, financial literacy is not just a concept that was coined to benefit people at their individual points of need, it has a global aspect in that even those people around you should benefit from your knowledge of money. Read on for more insights on this topic.
””Never spend your money before you have earned it.”
Thomas Jefferson
Why Is Financial Literacy So Important?
If you have never considered honing your skills on money management in a bid to understand how money actually works, now is the time. The following are some of the importances of financial literacy.
It Enables You To Understand The Fundamental Principles Of Money
As we have already mentioned, one of the top financial literacy importances is that it enables you to fully understand the concept of money.
First and foremost, you will be able to grasp some of the basic principles of money. For instance, you will learn that money and time are virtually the same thing.
In order to put that into perspective, imagine postponing an assignment that you could easily complete now to a later date. If payment for such work is made upon work delivery, then it simply means you have postponed your earnings to a later date. In essence, you will not just have wasted your time, but also your money by deferring your earnings.
Another principle of money that only financially literate people understand is that money is scarce. Therefore, whatever you have should be guarded jealously. There are more principles of money including stability and value.
In this best selling book by George S. Clayson, he goes into depth about financial literacy and how to play the game to win. Even though it was published in 1926, it still has all the fundamental principles that the wealthy use everyday.
If you wish to master the whole concept of money, this is where you need to start. Acquaint yourself with all the characteristics and principles of money because you will need to apply them sooner or later.
Preparing You for the Life Ahead
Financial literacy can also enable you to prepare for what the future holds. This especially holds true for students and other young people who still innocently believe the world is a bed of roses. We can leverage our financial literacy to advise young people on mindful spending and the need to be frugal.
If we can successfully convince high school and college students that the world owes them nothing by being flamboyant, we can effectively prepare them for what their financial future holds.
From time immemorial, young people have been continually made to believe that jobs come as soon as they graduate from high schools or colleges. While a few may be lucky to land well-paying jobs, a great majority always ends up a frustrated lot. What if we try and shift the narrative from job seeking to job creation?
Our young people will now understand that real financial freedom comes when they utilize the innovative technologies taught in their various schools to create jobs. That way, they can be adequately prepared for whatever life throws their way. And these are things they can only understand if they are financially literate.
Managing Your Income and Expenditure
This is perhaps one of the most important areas where financial literacy is applied. Many financial advisors will readily agree that the only sure way to affluence is to maximize your income and minimize your expenses. And when it comes to maximizing your income, there are so many ways to go about it.
But the most practical and effective method is to pursue a side job. Side jobs are jobs meant to complement your regular job. The internet is awash with such opportunities, and the best part is that these jobs come with a level of flexibility and independence. Also, there are usually no limits to how much you can earn, something that could help set you on the path to financial freedom.
In addition to diversifying their income streams, financially literate people will also understand the importance of minimizing their expenditure. These involve little adjustments you make in your personal and family life, but the ones that go a long way in sealing financial loopholes.
The skills and knowledge of a financially literate person will always kick in when they detect possible channels through which their money could be unduly lost. In the end, you will have a solid grasp on your finances and be able to make even more financially-sound decisions when it comes to investing your money.
Managing Your Financial Expectations
Most expectations have one thing in common – they have a way of not living up to our wishes. And when our wishes are not granted, we may not have control of how we respond to the new developments. This holds true for financial expectations.
A financially literate person will understand how to manage all expectations relating to money. This is crucial in that whichever way these expectations manifest themselves, they will still be able to accept the outcomes rationally and without a fuss.
A case in point is debt management. If you are financially literate, you will probably already be aware of a concept known as bad debt. In lay terms, these are debts you cannot recover. So, let’s say you had loaned a friend a substantial amount of money on the promise that they would pay you in a week’s time. But as it turns out, your friend is unable to pay and now you are so furious you cannot think or act rationally.
If you were aware that debts can go bad, you would not have banked on your friend to repay the loan. Instead, you would have focused more on how to remedy for that in the event they default. Such is the kind of knowledge and experience only financially literate people can possess.
Fostering a Global Perspective on Money
Last but not least, financial literacy enables us to grasp money from a global perspective. Through the knowledge learnt, you will be able to understand how the global financial systems work. You can effectively interpret what makes currencies in various countries to be valued differently. Understanding money from a global perspective is important, as it could also help you predict austerity.
For instance, financially-literate people must have adequately predicted the current Greek debt-crisis, or the financial implications of BrExit. These predictions will enable you to understand whether investing in regions affected by such major economic shifts is a financially-viable decision or not.
When preparing for austere times, financially literate people will accurately predict which currencies are likely to be worst-hit, and which ones will remain stable. They can then make adjustments accordingly, such as converting their savings into the currencies that are likely to be stable post a financial crisis.
Lastly, you will also be able to grasp the meaning of some of the most elusive concepts in the money market, and leverage these to your advantage.
Things You Must Know To Be Financially Literate
Are you financially literate? The following are some of the things you should be aware of in order to achieve financial literacy.
1. You are your most valuable asset.
Even before you think of making more money by diversifying your income streams, it is important to establish where your strengths lie.
When taking stock of all the assets you have at your disposal, never forget that you are the most important one. Therefore, try to leverage your own human capital first. This you can do in various ways, such as acquiring the necessary skills on financial management through proper training.
2. Never lay all your trust in yourself when making financial decisions.
No matter how much of a genius you are, you can never bank entirely on your brain when making financially-viable decisions.
This explains why many startups fail despite the mental and academic clout of the people behind them. When it comes to financial matters, expert experience makes all the difference. Always rely on expert advice, and let your intuition follow.
3. You need other people.
The journey towards financial literacy cannot be charted alone. You need other people. As we have already mentioned, experts in the domain of financial management should be your number one friend.
Additionally, try and associate with other people, especially those of similar interests and ambitious. Remember that even those people who seem utterly foolish might surprise you with their ingenuity. Listen to every voice and sift through opinions as you gain more experience in financial literacy.
4. Always be aware of risks.
Those who have walked the path of financial freedom have one mantra that they live by – You Do Not Want It To Happen, But It Pays To Be Prepared. This is a very important slogan that you might also want to adopt when seeking financial literacy.
You should remember that when all is said and done, it is actually easier to lose money than to gain it. So, be wary of all risks especially when making long-range financial plans.
5. Think global.
The world has indeed become a global village, and one thing that has contributed to this globalization is money. This explains the need for a global outlook when making any financial decision.
Thinking global does not just entail pursuing investments in offshore countries. It involves understanding how shifts in the global economies can impact your fortunes right in your locale.
Here’s What You Should Do Next…
Financial literacy is not acquired overnight – it is a continual process that even the most experienced people in financial management continually pursue. Achieving financial literacy entails making certain adjustments to your personal life.
Better yet, it is a process that requires you to adopt a global perspective in every decision you make in relation to money. In order to give you even more perspective, here are some books we recommend that will boost your financial IQ:
