Why is Financial Literacy Important?

a woman reviewing her bank statement and deciding what to do with her extra money

Financial literacy can impact a person’s daily life in many ways. Where they live, what vehicle they drive, and when they can retire all hinge on how a person manages their finances.

Everyone should take time to understand their situation and how they can work to improve their financial health. Where should they begin? We will discuss what financial literacy is, why it is important, and how to leverage this knowledge.

What Is Financial Literacy?

Learning the ins and outs of financial matters can seem overwhelming. Embarking on the path to financial literacy means learning about one aspect at a time. A person needs to start with basic knowledge of how finances work regarding saving, spending, debt, personal loans, and credit. As they build on their understanding of these topics, they can begin to build upon their knowledge base with more advanced concepts like investing, retirement accounts, and credit scores.

Why Is Financial Literacy Important?

No matter where a person lives, their age, or income, being financially literate is vitally important to their quality of life and wellbeing. Understanding their financial health assists a person in a few ways.

1) Maintain Financial Control

Being financially literate can provide a person with an understanding of how managing their budgets can affect their life. If a person is not financially literate, they may depend too heavily on others for guidance. This practice can get them into financial trouble.

2) Make Good Decisions

Understanding personal finances is the preparation for making smart decisions. For example, a financially literate person would understand the importance of saving for an emergency fund and contributing to their company’s retirement plan.

3) Be Prepared for Financial Emergencies

Unexpected issues and emergencies are part of life. Being financially literate proactively prepares a person to handle these emergencies without making a financial misstep.

4) Protect the Future

By knowing how to save, spend, and invest, a person can build a secure, financially stable future.

How Are Financial Literacy and Personal Finance Linked?

What is Financial Literacy? According to the Financial Educator's Council, financial literacy is defined as "understanding the topic of money".

What Is Personal Finance? According to the Corporate Finance Institute , personal finance is defined as the "process of planning and managing personal financial activities such as income generation, spending, saving, investing, and protection."

Financial literacy and financial stability are closely aligned. The more financially literate a person, the better they understand how to manage the financial aspects of their life. Three ways financial literacy and personal finance tie together are by:

Understand the Connection Between Making and Spending Money

Making and spending money are the foundations of a person’s financial picture. By understanding the smart ways to allocate money, such as savings accounts, investments, and retirements, and the frivolous ways, such as expensive clothing, meals, overspending, and risky investments, a person can proactively decide how to allocate their income.

This advice is also true of budgeting. A person who is not financially literate may not even make a budget or know where they are spending their money. Financially literate people are more likely to follow a budget and track their spending closely.

How to Improve Your Financial Health

Being financially literate can open doors for a person. By understanding the concept of saving, interest rates, and investing a disciplined individual can set themselves up for financial stability.

Control Spending

It is impossible for a person to spend more money than they make and financially thrive. Becoming financially literate may motivate a person to stick to a budget and cut out spending money on goods and services they do not need.

Maximize Saving

Finding ways to save money lets a person benefit from the power of interest.

Plan for and Protect the Future

Financially savvy people start investing in their futures rather than spending all their money in the present. This practice helps build nest eggs that allow them to keep debt loads low and look forward to a comfortable retirement. Certain retirement investments add tax advantages.

Where to Start Becoming Financially Literate?

The internet. There are tons of online websites that offer detailed explanations about numerous financial topics. Mobile apps. Download money-tracking, budget, and savings apps to stay accountable. These tools help learn about finances firsthand. Understanding budgets, saving, investing, and debt are all components of being a financially savvy person. By proactively learning about these things, a person can curb the bad habits and build new, more responsible ways to allocate their money.

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