The Indisputable Importance of Financial Literacy

By Susan

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Last Updated: August 14, 2021

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The Financial Industry Regulatory Authority (FINRA) gives a test containing five questions as part of its National Financial Capability Survey at yearly intervals to assess customers' understanding of interest, compounding, inflation, diversification, and bond prices. About 34 percent of those who took the most recent test got four out of five questions right, implying that the fundamental economic and financial concepts that fuel these issues are predominant.

FINRA also reported in 2020 that about 66 percent of the American population is considered financially illiterate. In a new survey by the National Endowment for Financial Education (NEFE), 88 percent of Americans believe the Covid-19 pandemic is causing them financial stress. These challenges are a compelling cause for us all to develop or improve our financial literacy. This article will delve into what financial literacy entails and why it is so essential to all.

Now, what Is Financial Literacy? Financial literacy is the comprehensive knowledge of economic components, and skill sets such as budget planning, investing, leveraging, taxes, and personal finance management — elements that are important in our daily lives. There is a broad range of information available to help us see the possible costs of our actions, and taking the time to learn these principles and others will help us achieve financial stability. Being financially illiterate refers to the lack of such skills.

Since financial literacy starts with your first dealings with money, it is a lifelong process with both positive and negative outcomes. You will learn financial literacy by studying personal finance educational material and also through real-life experiences. Financial professional counseling is another example of such a measure. Understanding how money works, setting and reaching financial objectives, and dealing with critical financial problems are all parts of financial education. Some critical elements of financial literacy that must be studied and understood are highlighted below.

  • Budget planning: Four significant uses of money determine a budget; running expenditures, investing, savings, and donating. Creating the optimal balance among the primary uses of cash allows people to properly distribute their resources, leading to financial freedom and development. When all is said and done, a budget should be constructed in such a way that it pays off all current debt while still allowing for savings and profitable investments.
  • Investing: Towards becoming financially literate, one must first learn about essential aspects of investing. Rates of interest, market values, volatility, risk reduction, and indexes are some of the components that should be understood to ensure profitable investments. Education about important investment components enables individuals to make more informed financial choices, leading to an increase in income inflow.
  • Leveraging: By and large, almost every person is required to borrow money at some point in their lives. Understanding bond yields, compound interest, time worth of cash, installment periods, and credit structure is critical for successful borrowing. If the above conditions are properly understood, an individual's financial literacy can improve, providing realistic borrowing guidance and avoiding futuristic financial pressure.
  • Taxes: Understanding the different types of taxes as well as how they affect a person's net revenue is critical for achieving financial literacy. Each source of revenue is taxed differently, whether it is work, savings, mortgage, inheritance, or unforeseen. Understanding the various taxation promotes financial stability and improves financial efficiency through personal finance management.
  • Personal Finance Management: The most critical criterion, personal financial management, entails a combination of all of the above-mentioned elements. Financial stability is achieved by combining the above-mentioned financial components to strengthen and raise deposits and reserves while decreasing lending and liability. Having a thorough understanding of the financial elements described above ensures an individual's financial literacy improvement.

Where can you learn Financial Literacy? Aside from gaining insights from physical conversations with people and day-to-day experience, there are various resources and online courses, which extensively talk about the earlier mentioned skills, available to help people improve their financial literacy.

Conclusively, any increase in financial literacy would have a positive influence on people's ability to plan for their future. The latest trends make it much more important for customers to understand simple finances because they are being forced to carry more from the burden of investments in their retirement savings while also trying to decode more complicated investment opportunities. Financial literacy is not easy to achieve, but once achieved, it will greatly reduce life's burdens.

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