5min read
Published on: May 31, 2024
Financial literacy is about understanding the main financial concepts, such as the value of money, compound interest, debt management, and planning. In 2024, over 66% of adults worldwide remain financially illiterate.
Key Takeaways
➔ Despite advancements in digitisation and increasing education resources, the percentage of financial illiteracy remains high worldwide.
➔ Financial education involves managing daily finances and creating long-term financial stability.
➔ People with higher financial literacy are more likely to control their spending, save for emergency funds, and participate in retirement planning than those with lower knowledge.
➔ Understanding financial matters can help people better assess investment options, make sound mortgage decisions, or effectively control daily expenses.
➔ Effective debt management is the most essential part, clearly representing the importance of financial literacy.
As the cost of living keeps rising, many people feel financial pressure that seems out of their control. The suggestion to learn more about personal finance management usually sounds very general. What exactly does financial literacy mean?
According to a Standard & Poor's survey, over 66% of adults worldwide are financially illiterate. Recent talks on personal finance and numbers are a cold shower to many. However, these topics should not be overlooked. This blog will help you learn what financial education consists of, its impact on your life, how to improve it, and more.
To begin with, financial literacy applies to different financial skills, such as personal financial management, budgeting, and investing, to the real world. Financial literacy is about understanding the main economic concepts, such as the value of money, compound interest, debt management, and financial planning.
Financial education involves managing your day-to-day budget and creating long-term financial stability in times of crisis, even if that is on a national level. It implies setting and achieving financial goals, being conscious of unfair financial practices, and dealing with financial challenges. Financial literacy is achieved by learning how to make and stick to a budget, tracking expenses, solving debts, and preparing for future financial needs, such as retirement.
Based on a report conducted by the Financial Industry Regulatory Authority (FINRA), people with higher financial literacy are more prone to control their spending properly, save enough for an emergency fund, and participate in retirement planning than those with lower knowledge. In the current economic situation, where pension plans are rarely found, and workers are mainly on their own in making complex financial decisions, financial education becomes a must.
The transition from employer-sponsored pension plans to self-managed retirement plans like 401(k)s or individual retirement accounts (IRAs) proves the necessity of vital financial literacy.
The lifespan of the people is increasing, the retirement periods are getting longer, and the Social Security benefits are not enough to cover the basic living needs, so the financial planning is becoming more and more complicated.
Moreover, many options are available from banks, credit unions, brokerage firms, and other financial institutions. This is why making wise choices is of utmost importance to avoid debts and secure financial retirement.
Apart from empowering you to search for the best saving and investment opportunities, the knowledge you get from financial education will be your best defence against any bad financial choices. It helps to understand the complicated products and market conditions, which are usually scary for beginners. Besides, by being financially educated, you can assist your family members in making the right financial decisions, which is vital at a time when personal finance keeps changing.
Simply put, financial literacy is a skill and a necessity for future financial security. Whether saving for retirement, managing your daily expenses, or merely trying to learn how money works, financial literacy can change your life and the lives of the people around you.
Financial education empowers people and makes them confident. Being familiar with the financial rules and strategic choices, you are more ready to handle your financial life on your own.
Image: The impact and benefits of financial literacy, by Finance Strategists
Financial literacy for beginners is the key to making better financial decisions. Understanding financial matters can help you better assess investment options, make sound mortgage decisions, or control daily expenses. Knowledge of the possible risks and opportunities and the ability to evaluate options critically are necessary skills that help people overcome challenges in the financial world and avoid common mistakes.
One of the key advantages of financial literacy is effective debt management. It includes knowledge of interest rates, the dangers of borrowing too much, and the development of strategies to manage and reduce debt. By learning how credit works, you can negotiate better terms and lower high-interest debt. Preventing excessive debt is the main strategy for keeping personal or business finances at a manageable level.
In a time when scams and fraud are present in every online corner, learning more about protecting your finances is critical. Financially educated individuals can protect their assets by knowing the mechanisms of financial transactions and the signs of scams. This knowledge can help reduce the probability of being the prey to investment scams or false financial products.
You can increase your knowledge about financial products and services in multiple ways. Below, we will discuss some of the most straightforward ones.
Many platforms, websites, and applications offer educational material on the importance of financial literacy—one of them is BitDelta. These resources include simple budgeting tutorials and the most sophisticated investment strategies; hence, individuals can adapt their learning pace and style. Podcasts, webinars, and video tutorials are designed to meet students' learning styles and needs. However, it is important to use credible and up-to-date sources to ensure the information you get is reliable.
Financial literacy usually starts with formal education. Many institutions, from the primary to the highest levels, now offer money management, economics, and personal finance lessons. Besides, different government programmes are aimed at specific groups, like low-income families or older people, to increase financial literacy.
An excellent example is the nonprofits organisation in India, Native Financial Education Initiative (NCAI), that provides the resources and initiatives for financial education.
The world of finance can become so complicated that today, you need to consult with professional advisors, planners, and counsellors, to adjust your financial life.
Image: A couple consulting with a financial advisor, by CNBC
These specialists are full of expertise and adjust their advice to your financial goals, situation, and risk tolerance. Whether you are thinking of a peaceful retirement, you want to invest in the stock market, or you are planning to buy a house, such advisors can help. They are the ones who are equipped to provide not only personalised strategies but also the latest insights, making sure that you are well informed and ready when the financial environments change.
Networking is a way to get different opinions on financial management. Through communicating with friends, either at casual hangouts or structured groups, you can access a wealth of information that comes from everyday experiences. These interactions can bring to light new financial tools, products, or strategies that would have been otherwise hidden.
Financial education is a never-ending process; however, developing good financial habits is never too late. This involves accumulating and improving the skills necessary for budgeting, debt management, and making decisions related to credit and investments. Below are several strategies to boost your financial literacy.
First, you can learn to write down your income and expenses to start financial planning. Use tools like Excel spreadsheets, budgeting apps, or traditional pen and paper to track monthly income–from paychecks to expenditures like rent and utilities and discretionary spending like dining out and shopping.
The principle is about implementing “first things first” . . . It should follow the "pay yourself first" path to increase your savings. Achieve the savings target, figure out the monthly amount to be saved for this target, and then put it aside before dealing with the other expenses.
Bills should be paid on time. Do not delay paying your bills to avoid late fees and penalties. Automatic debit, bill-pay apps, or payment reminders are good tools for keeping a punctual payment schedule.
Financial literacy for beginners is the knowledge of your credit score, a parameter that impacts the interest rates you get on loans and credit cards.
Image: Credit score ranking and determining points
Being aware of what affects your credit score, such as credit inquiries and credit utilisation ratios, is a must.
The most essential part of financial literacy is effective debt management. Use your budget to manage and decrease debts by reducing spending and increasing payments. Designing a debt reduction plan, for example, by prioritising the loans with the highest interest rates, is a pre-emptive way of dealing with the liabilities. In case of debt overload, it is advisable to contact the lenders to talk about the renewal of the repayment terms, the consolidation of the loans, or the search for debt counselling programs.
Investing in your future includes joining an employer-sponsored 401(k) plan, raising the contributions to get the full employer match, thinking of other investment options like Individual Retirement Accounts (IRAs), and more. The investment portfolio diversity among the stocks and cryptocurrencies, fixed income, and commodities can be the key to an easier retirement. Often, people turn to financial advisors to determine the amount of money they will need for retirement and to devise strategies to reach these financial goals.
Financial goal setting is the first thing you should do in financial literacy. Begin with differentiating between short-term and long-term goals. The short-term goals are the ones that have the immediate financial need or the desire, while the long-term goals are the ones that cover the significant future milestones like retirement or homeownership. Determining the funds required for each goal includes factors like inflation and time horizon (the time until the goal is to be achieved). Achieving goals can be an excellent motivator for celebrating them. It can also remind you that the financial goal you are set to achieve is so important that you must be committed to it.
To start a budget, it’s advised first to list all the monthly expenses. These are the constant expenses like rent, the variable expenses like utility bills, and the periodic expenses like car insurance. Plus, consider the daily living costs, which include everything from food and clothing to gas, entertainment, and unexpected needs like medical emergencies or home repairs.
Also, it’s essential to analyse your whole income. This includes all revenue streams: main job, part-time job, tips and other money like child support. The core of budgeting is deducting your total expenses from your total income. A negative result indicates that one is spending too much; hence, one has to either cut costs or find a way to increase revenue. On the contrary, a positive balance points to the fact that some money can be put into savings or used for other financial purposes.
Budget creation is the first stage of what is generally called financial literacy, and it is characterised by understanding the mechanics. Financial literacy includes a wide range of financial skills, including saving, investing, debt management, and risk mitigation, which are all critical for a financially secure future.
Financial education is about mastering skills like budgeting, saving, investing, managing debt, and planning, while protecting assets through risk management. These components are the base of the process of creating financial habits and realistically achieving economic goals.
To boost your financial literacy, participate in various educational programs and read books, newspapers, or articles on personal finance. Seeking advice from financial advisors and teachers can deepen the understanding and application of financial principles even more.
The creation of financial goals is the best way to organise the whole financial journey and, thus, to make the necessary and well-informed decisions on money matters. Goals are the key elements of the process of wealth accumulation, debt elimination, and financial security for the future.
Living within your means is about applying the principle that your income is enough to cover all your expenses without the need to borrow. This approach eliminates financial pressure, increasing savings, and guaranteeing long-term financial health.
An emergency fund is a lifesaver, set up to deal with unexpected events like healthcare emergencies, urgent home repairs, or sudden unemployment. This fund is key to preventing financial instability and dependence on high-interest debt options.
Solid literacy in personal finance management results in proper planning of spending, saving, investing, and more.
Benefits of financial literacy for beginners include better financial management, lower debt, higher savings, and improved credit score.
Personal finance refers to the financial management of an individual which includes the achievement of personal financial goals, the management of risks, and the attainment of financial freedom.
Personal finance enables people to plan for their future by managing their income, expenditure, savings and investments.
The overall purpose is to attain financial health and freedom through healthy control of revenues and expenditures, saving and investment.
Financial literacy results in overall better decision-making when it comes to financial products, services, and approaches.
Yes, it is important to know financial literacy to make healthy financial decisions.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
Join the community to receive exclusive market analysis and updates!
Ignite your financial journey with BitDelta's diverse asset classes.
