Having a high financial literacy means having a solid understanding of financial concepts that leads to sound financial decisions.
Good financial literacy knowledge can help you avoid debt and prepare financially for the future. A better understanding of how finances work can inspire you to make certain decisions that can lead to saving for retirement, not taking on unnecessary debt, or helping you and your partner/family make smarter decisions.
Financial education is one of the best ways to improve financial literacy skills. There are several resources available today, from books to courses. Many of these resources are free, or a small monetary investment, but the knowledge you can gain is valuable. The most important thing about financial literacy is to get started as soon as possible to make better financial decisions now and in the future.
What Is Financial Literacy?
Financial literacy is understanding financial concepts and making informed financial decisions. This includes effectively reading financial statements, understanding interest rates and credit terms, and managing money. Financial literacy also includes being aware of how financial scams work and how to protect yourself from financial harm.
A strong financial literacy can help give you the knowledge you need to successfully protect your finances but also helps you learn to grow your money over time. This means knowing how to invest your money so that it starts to work for you by growing your savings or providing you with passive income that you don’t have to work to obtain actively.
What Is Included in Financial Literacy?
Strong financial literacy includes everything related to your finances, from bank accounts to borrowing money to investing. Here are the basic things that you need to know to be financially literate:
• How bank accounts work, including savings vs. checking accounts
• Debit cards vs. credit cards
• How credit works
• Understanding your credit score
• Borrowing money to buy a house or car
• How interest works
• Investing in the stock market or alternative investments like CD’s, Money Markets, etc.
• Saving for retirement
• Saving for unexpected expenses
These are just the basics to becoming financially literate, but all are extremely important in helping you make sound financial decisions.
Why Financial Literacy Is Important for Everyone
One of the most important life skills everyone should possess is financial literacy because it helps you take control of your financial future and achieve your financial goals. Strong financial knowledge and understanding can help you overcome poor financial decisions and make better long-term plans.
Managing money is a reality for everyone, and there is no escaping it. Many of us work hard to have enough money to meet the demands of the lives of our families. People also want to have enough money to experience things like vacations or dining out, or to be able to travel and live the life they seek in retirement. You may not be able to live the life you desire if you make poor financial decisions.
How to Achieve Financial Literacy
The best way to achieve financial literacy is by learning from someone who is already financially literate or trained to teach others. Many websites offer financial tips and tricks, but it’s essential to get your financial information from a reliable source. This means paying close attention to who you’re learning from.
Some questions to ask yourself when reading or listening to information that you think might be useful:
• Is the site an authority in the space, such as a government website or banking institution?
• If not, is the author qualified to share this information? For example, does the author have credentials such as a CFP or CEPF designation?
• Is the website only sharing information after I buy it, or is it free? Much of the best personal finance information is readily available for free online.
• Does the information being shared sound like good financial information? For example, is the author asking you to take out a loan at one of their partners with a high-interest rate, or are they advising you to save?
• If I follow the advice offered, does it sound like I will have more money for retirement?
• If I follow the advice offered, am I getting into debt I can’t afford? Am I getting into debt without receiving an asset (such as real estate)?
Ultimately, the best way to achieve financial literacy is to learn from knowledgeable people and then take actions that will put you in a better financial position. As you learn and grow, you’ll better understand which decisions are right and use common sense to eliminate harmful financial recommendations.
Consequences of Not Being Financially Literate
Without financial literacy, you could damage your finances for years by taking on unnecessary debt or even having to file bankruptcy. The lack of financial literacy costs the U.S. economy billions of dollars annually due to unpaid debts or the inability to spend money earned. This makes financial literacy important to not just you personally but also the economy as a whole.
Let’s take a look at the three biggest consequences of not having financial literacy:
Many different types of debt can be incurred, but the most common types include credit card debt, student loan debt, and mortgage debt.
Credit card debt is often one of the easiest types of debt to fall into because it can be easy to spend more at the swipe of a card than you can afford to pay back.
Student loan debt is another type of debt that is becoming increasingly common, especially as tuition costs continue to rise. The interest is what causes so many people not to be able to buy homes or live the life they had previously imagined.
Mortgage debt is also a common type of debt, but it is usually incurred when buying a home, and many people consider it an investment. Locking in mortgage debt at the right interest rate for a property that is likely to increase in value might be a wise financial decision. Still, a lack of financial literacy could prevent you from determining the investment potential.
2. Making Poor Financial Decisions
One of the most significant consequences of not having financial literacy is making poor overall financial decisions. This can include things such as spending more than you can afford, investing in risky financial products, or not saving for the future. These financial decisions can often lead to financial instability or financial trouble when the unexpected happens.
One of the most severe consequences of not having financial literacy is bankruptcy. Bankruptcy is a legal process that helps people who can’t pay their debts get a fresh start. It can be a costly and time-consuming process, and it can also harm your credit score for many years to come.
THE BOTTOM LINE
Being financially literate can make all the difference in your life when looking at the quality of your life and how prepared you are for the unexpected. Not having strong financial literacy can prevent you from buying a home, taking vacations, or being ready to retire at the right time. Financial literacy is the pathway to a stronger and more prosperous future, living the life you want instead of just trying to survive financially. Check out our helpful links to get started on your financial literacy journey.