We used to live in a cash economy that made the vast majority of daily transactions simple and straightforward. These days, the situation couldn’t be more different. Cash is vanishing from society at a frightening pace and many people do not have the skills to function in a world where online shopping, quick credit and digital transactions are king.
What is financial literacy?
Financial literacy is the ability to understand how to make good financial choices and manage your money in a way that allows you to prosper. A financially literate person can allocate an appropriate proportion of their income to cover their expenditure and put money towards other goals such as debt repayment, savings and creating a rainy-day fund. They are also able to navigate the financial marketplace with confidence and make informed decisions about products such as credit cards, loans and investment opportunities. This guide on the various pillars that make up a solid foundation of financial literacy is a good starting point but if you want the shorter version…
There are five key principles of financial literacy. They are:
- Understanding how much you earn, including pay, benefits and the deduction of tax
- Saving and investing to achieve short-term and long-term financial goals
- Protecting your money by avoiding fraud and buying insurance policies
- Spending wisely by comparing prices and budgeting
- Managing your credit record and borrowing money at the lowest rate of interest
Why is financial literacy so important?
Financial literacy is more important now than it has ever been before. That’s due to several factors. Firstly, consumers have never had so much choice as they do today, and many of those products are more complex and sophisticated than they have been in the past. Consumers are also shouldering more of the financial decisions, with many people choosing to manage their own retirement planning. The financial markets are also swifter and more volatile, with conflicting views making it difficult to create and follow a financial roadmap.
One study in 2008, found that those who are financially literate have double the wealth of those who are financially illiterate in retirement. As well as failing to adequately plan for retirement, those with low levels of financial literacy also borrow more, earn less and pay more interest and unnecessary fees on financial products throughout their lives.
What can people do to improve their financial literacy?
Any improvement an individual can make to their financial literacy can have a profound impact on their future financial prospects. The good news is that there is no shortage of tools available to those who want to become more financially literate, and importantly, they should always be accessed for free.
Your bank’s app or website is a good place to start learning about the different financial products available. Your bank’s app may also allow you to track your spending patterns and help you create a budget. There are also a number of podcasts that offer free financial lessons and tips to help you develop your skills in your own time and build from the ground up.
What’s the most important financial lesson you’ve ever learned? Please share your thoughts with our readers in the comments below.
To read more on topics like this, check out the finance category.