Financial Literacy: Why Do We Need It?

                                                  “An investment in knowledge pays the best interest.”

Benjamin Franklin

People remember Franklin for his contribution to American history, but some of his philosophical views, including the one mentioned above, have taught the world the way to lead a prosperous life over a period of last two centuries.

Surely, a lot changed since Franklin shared his account on personal finance and the importance of financial literacy. But it still manages to stay relevant in today’s world where the market trends change so rapidly and drastically.

Today, there are numerous investment options that allow you to multiply your funds, but the most profitable option that one can invest in is the knowledge that allows a person to make financially responsible decisions.

The Concept of Financial Literacy

Majority of the people, especially the millennials struggle to manage their personal finances because they are not financially literate. Financial advisors and consultancies are there to help them make better financial decisions, but that’s not enough.

Most of us aren’t even familiar with the term “financial literacy” which explains why we face money crunch at the end of every month. Wouldn’t it be better if you knew how to make better use of your money? Well, financial literacy allows you to do that.

Financial literacy is described as the knowledge of everything that is related to finance, including debt management, credit management, investment opportunities, market trends and the way economics work.

According to Investopedia, the lack of financial literacy is not only a problem in developing, but also in emerging economies. Even in the developed economies, the consumers fail to exhibit better financial management abilities. You will be shocked to know that the US ranks 14^th in the financial literacy ranking.

Why should we invest more in financial literacy?

Knowledge is the key to success, especially when we are talking about personal finance. And now that the financial ecosystem is more volatile than ever, being financially literate can be more rewarding than you think.

• Financial independence:

Parents can support our expenses till a certain period, but they have their retirement plan to worry about. Whether you are working in the professional field or pursuing a college degree, being financially sound can help you manage your expenses proficiently while making you financially independent.

• Making the right choice:

Earlier, it is used to be easier to choose a lender in the market since the choices were limited. Now you have hundreds of options for every single financial need, be it health insurance or a student Instant loan. Having a thorough knowledge of the financial ecosystem may help you choose the right option.

• Budgeting:

All of us know how difficult it gets to meet the expenses as we approach the end of every month. We even struggle to pay the utility bills and the essential items, because we spend without any thought as soon as we get our hands on the salary/pocket money. When you have a better understanding of finances, you spend responsibly and don’t face money crunch towards the month end.

• Retirement planning:

After a certain point, every individual needs to think about his or her retirement plan. The way you save and invest today, is going to determine how you are going to spend your life after your retirement. Saving is an option, but making a smart investment is more rewarding in the longer run. When you have a better idea about the stock market and the investment schemes, you can put your money in a place that offers maximum return on maturity.

• A sustainable economy:

A financially literate consumer adds value to the national economy with his smart decisions. When you have better knowledge about the financial landscape, you make smart investments that inject funds into the economy. In order to achieve a sustainable economy, financial literacy is absolutely necessary.

How can you improve your financial literacy?

Learning how to be smarter and more responsible with your finances does not always have to be complex or time-consuming. You can improve your financial management skills by practicing some simple habits as well.

1. Start as early as possible:

There is no particular age for learning about financial matters. You can start as soon as you start grasping the complicated aspects of finance and economics. Increase your knowledge about the topics like investing, insurance, retirement, credit score, taxes and banking so that when the time comes, you can make the right move.

It is not possible to become financially literate in one day. So it is better that you start off early. The more you learn, the better your chances get at making economically sound decisions. People, who are financially more responsible from an early age, are less likely face financial constraints during difficult times.

2. Develop the habit of reading:

To understand the market trends and to identify your investment opportunities you need to be smart and knowledgeable, and there’s no better way to improve your knowledge than reading the significant material.

The habit of reading books, newspapers, finance magazines and online posts not only helps you develop your knowledge about financial management but also keeps you updated with the current changes in the market.

Read the finance segment of the local newspaper. They often share some crucial information about what’s going on in the local market. You can also indulge in books and magazines that focus on finance and economics when you have time.

3. Make use of the internet:

There are plenty of educational institutes that offer online courses on finance. You can enroll in these online courses even when you are working or pursuing a degree course in college. If you’re a student of Finance, you can use the internet to avail online assignment help for additional guidance.

That’s not it. The Internet offers an abundance of information, which you can use to improve your financial knowledge. Some of the resources are really helpful if you know where to find them on the internet.

Besides, you can access the channels and websites on the internet that dedicatedly debate and discuss the contemporary issues on finance and economics. Following those channels may offer you some crucial insight into the market.

4. Understand the cashflow quadrant:

The majority of the people do not know the fact that there are four primary ways of making money – employment, self-employment, business, and investment. You can work your way up to become an investor, but you need resources and thorough understanding of the various aspects of the financial ecosystem to succeed.

Figure 1: Source – Knowledgebringsmoney.com

“Rich Dad’s Cashflow Quadrant: Guide to Financial Freedom,” a book by Robert Kiyosaki, offers a better understanding of these cashflow quadrants. It discusses how people from E (employment) and S (self-employment) quadrants can move to B (business) and I (investment) quadrants for financial success.

5. Use financial tools:

There are plenty of financial tools that can help you understand the financial issues better. Take the financial calculator for instance. It can help you calculate interest rates, loan payments, percentages, amortization schedules, the cash flow and much more.

You can also use a financial dictionary that can help you understand the various terms and procedures in the world of finance quite conveniently. In fact, you have several options to choose from.

Wall Street Lingo: Thousands of Investment Terms Explained Simply, Dictionary of Finance and Investment Terms (Barron’s Financial Guides), Webster’s New World Finance and Investment Dictionary and Standard & Poor’s Dictionary of Financial Terms are some of the popular ones to invest in.

Conclusion:

Investing your time and efforts in becoming financially literate may not offer you instant returns, but it will surely ensure that you are financially successful in the longer run. Franklin understood the importance of investing in financial knowledge more than 200 years ago. It’s unfortunate that the most of us are yet to understand the significance of financial literacy.