Why is financial literacy important?

Ever wondered why you’re not making progress with your finances and why you keep making the same mistake over and over again? It’s because you lack the required knowledge. Whether you’ve just started earning or you’ve been earning for years now, there’s always an opportunity to stop making those mistakes and take charge of your money—it all starts with what you know.

What is Financial Literacy?

Financial literacy is simply possessing skills, knowledge, and behaviors that enable you to make informed decisions about your money. Financial literacy is not about your money controlling you, but you having control over your money. Financial literacy is also being aware of financial scams and knowing how to protect yourself.

Being financially literate means having the required knowledge and skills you need to manage your money. It includes skills like budgeting, saving, tracking your spending, setting a portion of your income for retirement, and debt management.

Learn Financial Literacy from Arkad and his son from the book The Richest Man in Babylon

In the book, The Richest Man in Babylon, George S. Clarkson used different stories to teach financial literacy. However, for this article, I’ll be sharing that of Arkad and his son Nomasir.

Arkad was the son of a humble merchant. He did not inherit his wealth from his father or have a sudden streak of luck. He had to build from scratch. A rich man, when he was young working as a scribe, taught him everything he knew. He applied what he was taught and was able to build great wealth.

However, Arkad’s son, Nomasir, didn’t know much about financial literacy, though his father had taught quite several people. And so to teach his son, before he would inherit his fortune, he needs to go into the world and learn how to make money on his own.

His father gave him three bags of gold and a clay tablet on which was engraved “5 laws of gold.” Unfortunately, Nomasir paid no attention to the tablets for he would have done things differently. It was when he had lost most of his money and his situation became critical that Nomasir remembered the clay tablet engraved with 5 laws of gold:

• Gold comes to those who know how to save.
• Gold proliferates with those who know how to invest.
• Gold stays with those who trust it to the wise.
• Gold is lost when you invest in things you don’t understand.
• Gold is lost quickly under get-rich-quick schemes.

Success began to come to Nomasir when he began to apply the rule of gold. Besides, the experience of failure has solidified the principle that without wisdom, gold is quickly lost to the one who has it. But with wisdom, gold can be made by someone who does not have it.

Key Components of Financial Literacy

There are five components of financial literacy, namely:

1. Budgeting and expense management:

A good budget requires understanding your income and expenditures, setting realistic goals, and tracking your spending.

Expense management requires making a deliberate effort to eliminate unnecessary expenses and prioritize important ones.

By mastering both of them, you can live within your budget and achieve your financial goals.

2. Saving and investing:

Saving is setting aside a part of your income for future use while investing is using that money you set aside to get more money. Savings provide you with a safety net, but investing allows your money to grow.

3. Debt management:

Debt is a common part of financial life. People borrow to achieve some goals. Being financially literate means recognizing the impact of debts, familiarizing yourself with the terms of debt, and making strategies to settle them effectively. It also means differentiating between good and bad debts.

4. Retirement planning:

Retirement planning means setting aside a portion of your earnings into a retirement plan. Financial literacy means understanding all retirement saving options as well as social security and how delaying benefits can increase monthly payouts.

5. Insurance and risk management:

Ensure you protect your assets as well as yourself. Insure your health, life, property, and auto against various risks. Other risk management strategies include having an emergency fund.

Why is Financial Literacy Important?

Financial literacy is a life hack everyone needs to have because it allows you to take control of your financial future and achieve financial freedom. Financial literacy supports your financial well-being and gives you the confidence that comes with managing your money well yourself. Financially literate people tend to:

• Manage money with a budget.
• Save more money for the future.
• Manage credit well and avoid unnecessary debt.
• Feel financially prepared for emergencies.
• Feel less stressed about money.
• Feel more financially secure overall.

How to Become Financially Literate

When it comes to financial literacy, there’s no one-size-fits-all approach. You need to discover the resources that best work for you. Here are some:

1. Self-study and online resources:

There are tons of platforms, websites, and apps that offer different courses or tutorials on financial education, ranging from the basics of both budgeting and deep investment strategies. You can pace your learning based on your comfort or needs.

2. Accessing formal education and awareness programs:

The foundation of financial literacy starts from what you know. Schools, colleges, and universities offer courses on basic money management, economics, and personal finance. Also, beyond the school system, government and financial institutions should organize programs that educate people about their finances.

3. Seeking professional advice:

Financial advisors, planners, and counselors are experienced in finance and can offer personalized advice concerning your financial situations, goals, and risk tolerance. Also, as the financial world evolves, professionals can provide you with updated information so you stay ahead.

4. Networking and learning from peers:

People learn better from others’ experiences. Networking with friends, whether informally or through structured groups, can offer fresh perspectives concerning finance. Hearing from others about financial successes and challenges can provide practical insights and lessons.

Consequences of Not Being Financially Literate

Financial literacy is important for your well-being, not just your well-being but also that of the country at large.

Let’s look at three significant consequences of not being financially literate:

Debts:

Different types of debts can be incurred just from not knowing how to manage your money well. The most common ones are credit card debts, mortgage debts, and student loan debts.

Making poor financial decisions:

Another major consequence of not being financially literate is making poor financial decisions. This could include not saving for the future, spending more than you earn, and engaging in risky investments. These financial decisions often lead to financial instability and crises when the unexpected happens.

Bankruptcy:

One of the most severe consequences of not being financially literate is bankruptcy. Bankruptcy is a legal process that helps people who are unable to pay their debts have a fresh start. It is a costly and time-consuming process and may harm your credit score for many years to come.

The bottom line

Financial literacy is an indispensable skill in our world today. Financial literacy helps you make informed financial decisions, save money, avoid debts, and ultimately achieve your financial goals.

Moreover, beyond financial health, it empowers individuals, reduces stress, increases confidence, and fosters a sense of security.