What is financial literacy?
Financial literacy is the ability to use specific skills to manage one's finances, budget and invest wisely. It is a whole concept consisting of a set of competencies. Financial literacy must get taught in schools for kids and teens because it is a crucial part of life that determines how successful children will become. The earlier the child learns finance basics, the better it will be for them.
Personal financial literacy helps to achieve goals, be it getting an education, changing careers, going on a trip, retiring a few decades earlier than the socially accepted age, and so on. Moreover, I'm sure you agree that we need money in almost every aspect of life! Also, knowledge of financial literacy allows you to manage your budget so that it is enough for everything, manage your debts and expenses, find ways to earn more and increase the profit of your business.
The definition of financial literacy
The meaning of financial literacy is simple. It is the ability to deeply understand the financial world's laws and act according to them. It is self-sufficiency, the ability to learn and improve your knowledge of economics, a willingness to constantly expand your toolkit of expertise, and not being afraid to invest in something or take out a lucrative loan. Financial literacy has many components that lead to successfully managing your money and earning a passive income.
Essential financial literacy topics include saving, real estate, budgeting, taxes and pensions, insurance, paying school fees and bills, buying a car and other major purchases. More advanced topics that every adult needs to know include investing, earning passive income, and dealing with deposits, loans, and other debt obligations. Sometimes a financial literacy programme includes managing your finances within your business and standing up to scammers who would like to steal your money.
Benefits of financial literacy
The benefits of financial literacy include the following:
- Using the law to understand how money works. Reading articles is not enough because you need a lot of knowledge, which you also get from practice.
- The ability to make informed decisions. When you're financially literate, you do not listen to anyone else's tips — unless it is the most successful investor on the planet. Instead, your experience and knowledge guide you, so you make decisions from an adult perspective. Lack of financial literacy puts you in the position of a child who does not know how to manage money and, therefore, always spends all the money on trinkets and wonders why they don't have a dollar left for lunch. Learning financial literacy should start at school, but not every school is prepared to introduce this training as early as next week.
- Staying financially secure at all times. That makes sense: Knowing how to manage your money increases your financial stability! Think about it: according to a recent study, 78% of American citizens live paycheck to paycheck, the average American has about $30,000 in university debt, and the amount of credit card debt in the United States exceeds one trillion dollars. Do those who have taken out one loan after another have financial literacy basics? Hardly. Can they get rich? Also unlikely.
- Knowing how to deal with investments. It is no longer basic financial literacy, but still essential. Without it, you will not build your financial empire and teach your money to make you more money. If you are at the beginning of the path, this is the advanced level that you will reach sooner or later. It is the level that any financial literacy programme aimed at developing financial thinking skills will take you to. At this level, you can afford a house, a flat, a car, and whatever else — you can earn for it, save up, buy it profitably, and earn again as much or more. Furthermore, investing allows you to save for your retirement so that you don't have to change the quality of your life and settle for less.
- The ability to recognise an unfair financial offer. Financial literacy is vital because if you have it, you can spot a financial adviser trying to scam you. Resultingly, you will not invest in pyramid schemes and will make fewer mistakes with your money. Of course, financial literacy does not guarantee that you won't make mistakes — we are all human. Nevertheless, it will make your life easier and more secure.
Why is financial literacy imortant
Financial literacy is very important for adults and teenagers alike. Unfortunately, those without basic financial literacy skills easily fall into the traps set by scammers on every corner. Wrong financial decisions take years to correct, and there is not always enough time to do so.
So, financial literacy campaign is vital because:
- It empowers those who study finance. The more information people have about economics, the more wisely they spend their money. This can be seen when teaching children and college students financial literacy.
- It teaches responsibility. Young people who have not studied financial literacy are likelier to behave irresponsibly than those who have learned it, at least through games. Such “future adults” know how to invest, pay bills, and save money. They will not allow a situation where they do not have money to pay their rent, and they will keep track of their credit history and pay their water and gas bills on time.
- It becomes a preventive measure for bad financial habits. A financially literate person will not invest in pyramid schemes or gamble for money. Others will not influence them to spend money, and good financial preparation is responsible for this.
- It ensures that you have a financial cushion. Statistics from various countries show that not every adult is saving for tomorrow, the day after tomorrow, or six months in advance. In the meantime, your financial cushion should allow you to live with the same level of spending for three to six months when you have a job if you lose or give up that job. A financially literate person can manoeuvre in any situation and will not be afraid of losing their job. This point is essential for women — they are still economically disadvantaged in many countries. Women are more likely to earn less than men, working in the same positions and with the same competencies, are more likely to end up in debt and are more likely to have to take an unpaid parental leave.
Examples of financial literacy
What example of using financial literacy in your life comes to your mind as soon as you see the phrase “money management skills”? Several sources of income? A good job? The ability to invest and make millions from it? Well, it is a much more complex concept than it first appears.
Example 1. A personal budget
You make a budget for each month: you write down how much money you have, where you will get it from, what you will spend it on, and what you don't want to spend it on. You do this in a notebook, notepad, or Excel spreadsheet. Then you use the plan and monitor how well you comply with it. By doing this, you ensure that you manage your finances carefully. Time after time, the situation improves — you realise what you can save on, where you will have to spend more, and how best to save money.
Example 2. False income schemes
You see an advert for a pyramid scheme on the internet. You are not interested in it, as you know how pyramid schemes work, and you don’t want to invest your money with enormous interest in something inconceivable. If the money-making system interests you, you will study it, find the reviews, and think if it is legal and as good as it seems. You will not participate in activities that involve entering the shadow economy.
Example 3. Investments
You trade on the stock exchange: you buy and sell stocks and bonds, and you study derivatives, that is, secondary investment instruments. You do not strive for high returns and try to keep your portfolio balanced. You don't tell everyone you meet about your investment strategies, but you don't keep them a closely guarded secret, either. It feels like, after a while, you could be teaching at a university, chatting about how you were able to save for a flat, a car, and a dream life by investing in the stock market. You have worked out how your children (even if you don't have them yet) will inherit the money, perhaps transferred a certain amount to a family trust or just puzzled over the issue.
Example 4. Giving up the herd instinct
“I just follow everybody else.” This is not your strategy now. You don't invest in mainstream tools like NFTs at their peak — you wait, study, ponder, and consult with financial analysts. You are wary of online projects, which look like a scam, even if everyone you know is already investing in these projects. You are not afraid to wait, refuse an allegedly profitable offer, step aside and look at the consequences of investor behaviour in the market. You will not be intimidated by anything — you look at all crises with a philosophical calm that infuriates many people. Because of this, you are always in the long run in the black.
Financial literacy skills
How to be financially literate? First, you need to have specific skills. They all fall into four categories: money and transactions, financial planning, risks, and financial markets landscape. In what follows, we will look at skills in these categories.
Category 1. Money & Transactions
The list of skills in this category includes the ability to recognise banknotes and coins, check payments and bank statements, and know how to pay for goods.
Category 2. Financial planning
It includes budgeting, managing your income, setting and achieving a range of financial goals, knowing your taxes, saving, and deposits.
Category 3. Risks
This category represents a combination of different skills: the ability to search for and describe financial risks, manage and avoid them if a risk occurs, knowledge of insurance products and savings investments, profit and loss, credit and interest rates. It also includes understanding how markets work and how to diversify your investments.
Category 4. Financial markets landscape
It is a theoretical category. The list of skills includes the knowledge of rights and obligations of financial services consumers and the ability to use this knowledge, the ability to draft and read financial contracts, to change and adapt to new economic conditions (economic policy, central bank rates, inflation rates, changes in social benefits, etc.). A person with knowledge of the financial markets landscape can identify which investment proposals are not worthy of attention and assess the correctness of economic forecasts. They will not be fooled by lousy credit well publicised in the media and can explain the differences between derivatives on different markets.
How to become financially literate
How do you become financially literate? It's simple — learn financial literacy. Let us show you what you need to do.
Learn to manage your budget. It is the first financial literacy class that absolutely everyone needs to take. Start making spending plans and earnings plans, and control your spending. Just look at what you spend your money on in your bank app. You can find free budget templates on Google. It also includes, by the way, setting goals: short-term (for a year) and long-term — longer than a year.
Find out your credit rating and research your loans. If the loans are straightforward — you open a textbook downloaded from the internet and read the chapter on loans — then the credit rating can be a problem. It will affect whether you get a loan and what interest you get offered. You can ask for a credit score from a special government service or a bank. Most of the time, it is free of charge. A high credit score will mean that you are a trustworthy borrower who always pays your money back. A low rating is just the opposite. Along with the rating, you can also see a report — it will show the state of your finances to inspection authorities and lending institutions.
Open a savings account. It is the first step towards investing. Open an account directly in the bank app. It has a lower interest rate than a deposit, but you can withdraw your money anytime. Examine the banks' savings account offerings and choose the one that looks the safest for you. Then you'll get a taste for it and start investing — there's no need to jump in feet first. Just realise that it's okay, it works and makes money.
Set aside money for an emergency. Living without savings is many hundreds of times scarier than living with them. You should always have a financial safety cushion. Learn to anticipate risks: job loss, another crisis, a new infection pandemic, an alien attack — just kidding! Save little by little, and set aside as much as you can from your salary, even if that amount won't exceed five to ten per cent. Reduce expenses if you realise you spend money on things you don't need. Look for analogues. Buy something that has already been used a couple of times if such an opportunity presents itself. It's okay to do that.
The best financial literacy books
A list of the best books on financial literacy, quotes from which you have probably seen more than once on the internet, includes:
“Rich Dad Poor Dad” by Robert Kiyosaki
This book tells the story of a boy who had two fathers. One father was poor, and the other was rich. The difference between them was only in their thinking and level of knowledge about finance. Therefore, the book doesn't educate you directly, but greatly expands your horizons and perspective on the situation.
“Money: Master the Game” by Tony Robbins
Seven steps to financial freedom await you inside. There's already a wealth of advice, examples, recommendations, references to research and literature analysis. There are also excerpts from interviews conducted by the author with the powers that be.
“Barefoot Investor” by Scott Pape
A quote book adored by novice investors. The author gives a simple financial management system and explains how to get rid of debt and retire without lowering your standard of living. Scott Pape is considered one of Australia's most trusted financial experts, and his books sell millions of copies. Nevertheless, there's a lot to learn!
“The One-Page Financial Plan” by Carl Richards
As the title suggests, the book provides a one-page financial plan. It is simple but works in most cases. It will help those who are afraid to dive into financial planning and need something light and short. The publication's author is a financial consultant who has worked for over 20 years in major economic companies.
“The Intelligent Investor” by Benjamin Graham
The Intelligent Investor is a mini-tutorial on investing in stable and long-term instruments. It explains how the market works and how you can beat it by choosing the most promising company and investing in it. This book attracted the interest of Warren Buffett himself, and he called it the best in the category of “Investments”.
Financial literacy courses
Which financial literacy course should you take to help you save, build a safety cushion, and invest money wisely? Here are three programmes to suit your needs.
"Investing Simple: Financial Freedom and Passive Income"
This course is ideal for beginners. Here you will learn how to manage your finances, how to invest and what not to invest in, how to choose securities on the market, how stock exchanges work and where to find funds to become an investor. You will be ready to take your first steps in the financial markets in just forty-three minutes of video lessons.
Learning by topic
"Financial Awareness: Basic Tools of Capital Increase"
The course is fantastic for those who do not know how to budget or have not fully figured out all the tricks of a strategic approach to financial planning. Inside are tips on saving, budget control, effective savings, and choosing loans and investment tools. Lectera's experts will also explain how to set financial goals, discuss levels of money management and how to avoid fraud. Above all, the course contains six auxiliary materials for better memorisation and six real case studies to practice your skills.
Learning by topic
"Investing in the Market. What To Consider When Choosing Assets"
Investing in the Market is an advanced programme focusing on financial instruments and institutions, stock exchanges, securities, forming investment portfolios and monitoring investor sentiment. Along with the lessons and additional materials, there will be instructions on investing correctly at different times in your life. Tests and case studies from investors who have been successfully investing for years will also be available.