Financial literacy is a term to describe the knowledge and skills that people need for responsible money management. For instance, it can include knowing how much you spend each month, your major expenses and your budget, and emergency funds. Financial literacy comes from understanding concepts such as “budgeting” or “savings.” Financial literacy aims to help people make informed decisions about their finances so they can have a happy life!
Basic Financial Literacy
Financial literacy is the knowledge and skills you need to make sound financial decisions. It means learning about the basics of personal finance and how to take control of your money. Learning about financial literacy doesn’t mean you have to go back to school for a degree in accounting. It can be as simple as making a budget for your household, understanding what goes into a credit report, or learning how to invest your savings. It’s a way of thinking about your money that will help you make good decisions now and in the future.
Components of Financial Literacy
There are many components to financial literacy. There are some basic components that are needed in every person’s life, and then there are components that help achieve financial freedom. You can have the basic components of financial literacy in place and still not be financially free. You can also have financial freedom and be very poor with your basic components.
The basic components of financial literacy include:
- Financial Planning
- Money management
- Money awareness
- Accumulating wealth
- Saving and Investing
- Financial Risk Management
- Knowledge and understanding of financial markets
- Saving and investing
- Investing in mutual funds
- Planning for retirement
- Understanding taxes and tax consequences
Each of these components is important, but the one that stands out is accumulating wealth. There is one more component to financial literacy, and that is to be involved in your finances. If you do not pay attention to your finances, then you will have no idea of where they stand at any given point in time. You can be financially literate and still spend yourself into bankruptcy if that is what you choose to do with your money.
Benefits of Financial Literacy
The benefits of financial literacy are vast. The ability to understand and master your finances leads to ease and convenience in your personal life and an overall sense of security. This is because financial literacy is directly related to your credit history, which in turn impacts your ability to get a job, rent an apartment, buy a car, and so on.
Financial literacy can also lead to increased health and happiness levels because a lack of money can cause stress and anxiety, which can, in turn, lead to a host of conditions and diseases. Financial stress is a major contributing factor in heart disease, cancer, and even suicide.
Financial literacy can also lead to more control over your life because you can determine your own income and your own schedule, both of which lead to greater responsibility and a sense of accomplishment. Being able to make healthy decisions for yourself is a life skill every adult should learn.
Learning about financial literacy can help you develop these skills:
- Save money by creating a budget and cutting unnecessary expenses like monthly subscriptions.
- Manage credit wisely and get out of debt.
- Get a job without being taken advantage of by employers.
- Make sound decisions if you inherit money.
- Protect your money from fraud and theft.
How To Be Financial Literate
Being financially literate is something that you have to work on every day. Work with a professional if you can in order to follow the proper procedures, and if you can’t, then don’t wait. The sooner you start, the better. The first step is to create an emergency fund for yourself. If things are tight and you need a loan, use it so that debt never becomes an issue in your life. Learn about tax debts and taxes in your area so that you know what needs to be paid when it comes time to file taxes. Stay away from credit cards, the debt traps. Instead, learn about investment options and mutual funds. Start saving for retirement as soon as you can. Don’t wait until you are forced to because it is too late then. Don’t rely on the government, your employer, or any other source of income for money. Save what you can when you can and keep saving until it becomes automatic. This is a long, hard process but one that must be done if you want to achieve financial stability and security in your life.
There are other things you can do as well. For instance, following business news in your community, such as the local paper, knowing how to balance your checkbook, and save money on day-to-day purchases are all good examples of financial literacy. You can teach yourself the things you need to know by reading books, attending seminars, or online courses. Another way is to take advantage of free materials, such as free personal finance books, interactive financial calculators, and online tools. The most important thing is to learn about your finances so that you can make good decisions for yourself and your family.
Examples of Financial Literacy
An example of Financial literacy is to have a basic understanding of how to manage a budget, understanding how credit cards work, learning about the different types of loans and what to be careful about when taking them out, knowing your rights as an employee and employer, understanding rates of return on various investments and when you should take them out. It is also knowing when you can afford to splurge on something special and what things you can pass up buying.
Many people think that financial literacy is all about knowing the types of banks and the good credit deals that can be had for each type. People believe if they just know the basics and are careful with their money, then they will be financially secure. This is not true, however, because there is more to financial literacy than just knowing what your bank offers. Financial literacy is knowing what you are putting in your bank account and why. Financial literacy is knowing how to properly use the tools that your bank offers you, such as debit cards, credit cards, online banking, etc. Financial literacy is also knowing how to properly save for retirement and not simply throwing money into any investment blindly-you must know what you are investing in and why you are investing it there.
You also have to know what happens with the money when it hits your account. Knowing how to choose the right accounts for you and what happens when you spend and borrow money is also part of financial literacy. You have to know how much is coming in and how much you are spending. You should know what kind of investments are good for your money and how to save for retirement.
In order to be financially literate, you have to know all about the current economic situation that is going on around you-you need to be aware of interest rates, tax laws, bank fees, etc.
Financial Literacy Tips
The financial world can be a scary place for the uninitiated, with terms like “stocks” and “short selling” bouncing around and arbitrary numbers with lots of zeros in them. But you don’t have to be an expert to live a financially healthy life; in fact, the basics of financial literacy (the ability to make and execute sound financial decisions) are something that everyone should know.
Here are some basic financial literacy tips :
- Don’t fall for scams. If you receive a letter telling you that you’ve won money, or that you’re about to be arrested, or that you need to pay your taxes right away or else, don’t fall for it. These are all typical scams used to prey on good people.
- Watch out for identity theft. The vast majority of identity theft is preventable–just by paying attention to your mail! If you get a letter that says you’ve won money or that you need to pay your taxes, make sure it isn’t from a legitimate source. Read the fine print if you’re unsure. You can also opt out of the pre-approved credit card offers from banks and credit unions and agreements for your bank account, many of which are stolen every year.
- Take a hard look at your spending. Once you’ve developed a budget, you have to know how much you’re spending on all of the various things in your budget, particularly those that don’t make sense. For example, if you’re only spending too much on clothing, it might be time to go shopping for cheaper clothing stores or look for ways to spend less money on clothing (such as re-using old clothes or getting creative with your wardrobe).
In order to achieve financial freedom, you need to spend time learning about financial situations in your life. It is not enough to read about financial literacy and then try to implement it. You have to take action and try new things so that your life can change for the better. If you continue doing the same thing, you will never notice that you are changing for the better. So, take the time to make a change for your future because it will pay off in the long run.