You may have come across the terms “being financially literate” or “financial literacy” if you have read through any financial or money-related news or articles.
Though being financially literate may seem like an underwent-years-of-training-at-a-business-school thing, it simply translates to: how well you understand your finances and how efficient you are at making your everyday money decisions.
Oftentimes, we tend to receive education and training before we’re fit enough to be assigned with certain responsibilities.
But dealing with money is a responsibility we all have regardless of our background, interests, or profession.
And sadly, the exposure of personal financial education remains obscure to many of us, leaving us with a blank face, a stressful mind, heavy shoulders, and even an empty stomach.
“Worldwide, only 1 in 3 adults are financially literate”, according to the S&P Global Finlit survey of more than 150,000 respondents in over 140 countries.
While statistics shows that 70% of the people worldwide are financially illiterate, you don’t have to be in that percentage.
This post will give you an overview of financial literacy and how you can work your way to become financially literate on your own.
What is financial literacy?
Being financially literate or financial literacy simply means being able to understand basic finances in order to make smarter money decisions in terms of expenses, savings, debt managements, and investments.
What Is The Significance Of Financial Literacy In Today’s World?
Personal finance used to be so much easier in the older days where wages are ahead of expenses and housing and people were more conscious about debts.
But today, the increase in financial products has fuelled a boom of debt and gave rise to inflations of everything but wages.
And without financial knowledge, you may be at risk of ending up with having so much month left at the end of the money. Or worse, being in debt forever.
Here are some statistics that show the significance of financial literacy in today’s world.
- 44% of Americans don’t have enough cash to cover a $400 emergency. (Forbes)
- 1 in 3 Americans have $0 saved for retirement. (Money)
- 42% of Americans will retire “broke”. (CNBC)
- 18% high earners (>$100,000) live paycheck to paycheck. (Willlis Towers Watson)
- 22% of Americans have no spare cash, followed by 21 percent in the Middle East and Africa, 20 percent in Europe and 15 percent in Latin America. (Financial Advisor)
What does it mean to be financially literate?
It’s the end of the month and you’ve got your paycheck at last!
How do I live until the next paycheck? How much should I save? How can I pay off my debts? How much do I need to live comfortably when I retire? What if there’s an emergency and I need some money, how will I pay for it? There are so many insurance plans, which one should I choose? How do I invest?
Do any of these questions ring a bell?
If so, being financially literate can help you answer those questions with confidence.
Because it means you will be able to have an understanding in several key areas like:
- Budgeting your money
- Saving for emergency and future
- Planning for desired future lifestyle
- Basics of loans (types of loans and the interest rates, etc.)
- Credit cards (selecting and using credit cards the right way, etc.)
- How investing works (pension plans, funds, stock markets, bonds, etc.)
- Financial risk managements (insurance, etc.)
- Basics of taxes (pre-tax, post-tax, etc.)
- Preventing financial frauds
So how does understanding all of those benefit you?
Benefits of being financially literate.
Before we move on, here are some statistics I found interesting that relates to financial literacy:
- Financial literacy accounts for 30-40% of US retirement wealth inequality.
- Financially literate individuals are 10 percentage points more likely to plan for retirement.
- On average, Individuals with lower financial literacy pay 50% more on credit card collective fees and charges than those paid by the average cardholder.
- Financially literate individuals are 6 percentage points less likely to be financially fragile.
By being financially literate, you will be able to:
Gain Control Of Your Own Finance
Instead of being a slave to your money, you now have authority over your personal finances. You will have the confidence to decide how you can leverage your money to improve your net worth and support your lifestyle.
Value Financial Goals
As you gain financial knowledge, you will be more aware of your realistic desires, turn them into your goal, and work towards realizing them.
Whether it is a short-term goal like a wedding, traveling. or getting a home improvement or a long-term goal like paying off a mortgage, starting a business, saving for your child’s education, or saving for retirement.
Obtain Higher Rate Of Return On Investments
Certificate of deposit or mutual funds?
As you build your financial knowledge, you will be able to make comparisons and selections on the type of investments with a higher rate of return with minimal risk.
Avoid Becoming A Victim
The scent of money always attracts predators—which makes you a potential target of unethical financial services and financial crimes.
Predatory Lending And High Interest Rates
With good financial money management, you’re more likely to have higher credit scores which are the main criteria to qualify for bank loans.
On the contrary, individuals with low credit scores are more likely to get rejected for bank loans, thus encouraging the individual to turn towards predatory lending with ridiculous interest rates and abusive terms.
While we are granted more convenience with the increased digitalisation of financial services, there is also an amplification in the number of financial fraudulent activities seen in the recent years.
According to the 2018 identity fraud study, the cases of fraud in the US alone was 16.7 million in 2017.
You can avoid contributing to these numbers by increasing your financial knowledge which gears you up in detecting possible frauds and preventing them.
Avoid Unnecessary Debts/Manage Debts Better
We’re being targeted by marketing ads everywhere. With poor money management, we are at risk of overspending and accruing interests in debts.
Besides that, many consumers who are financially illiterate are obligated to high interest rates as they enter into loan agreements without understanding how much they are paying for borrowed money.
With the understanding of, for example, compound interest, you are able to pay off your debts more effectively with the lowest amount of interests.
Possess Financial Cushions During Emergencies
A boost in your financial knowledge builds your propensity to save actively to cope with unexpected financial shortfalls.
Imagine getting a totalled vehicle in an accident.
Or the sudden need to give up your job, or even a layoff, would you have a cushion of money ready to get you through the weeks or months until you found a new job?
While knowing some of the financial terms can certainly make it easier, it is not only about the theory that grants you financial stability throughout your life.
Breaking it down, there are 3 components that converge on financial literacy.
The 3 main components of financial literacy
Financial literacy consists of 3 main factors: financial knowledge, financial behaviour, and attitude towards money.
Having the basic knowledge in finance is a prerequisite to effective savings and wealth accumulation.
Some of the basic financial terms that you should know are:
- Compound interest – one of the main financial terms to know if you want to get the best out of your savings or investments, or even to manage your debt more efficiently.
- Inflation – the increase in prices of goods and services gives you the idea of how much you will need to save as you move towards financial freedom.
- Risk Diversification – the act of spreading your money across different financial instruments. In simple terms, it is to avoid placing all your eggs in one basket.
- Debt – understanding what a debt is gives you the ability to differentiate between good debts and bad debts, and the interests incurred.
Your actions and behaviour in managing your money greatly impacts the shape of your financial health.
The 3 main positive financial behaviours that you should implement are:
- Saving and long-term planning – the act of saving actively in case of a short-term financial shortfall or for a long-term goal.
- Making considered purchases – seeking independent information and considering multiple options before making a purchase.
- Keeping track of cash flow – keeping watch of your financial affairs and making sure that you pay your bills on time.
Attitude Towards Money
The outcome of an individual’s success or failure revolves around an individual’s attitude —which motivates us to apply the knowledge we have to reach our goal destination.
Often instilled naturally during childhood, the two common attitudes towards money are:
- optimism and abundance – the perspective of seeing money as a tool to reach financial success which encourages good financial practice.
- scarcity and pessimism – the perspective of seeing money as a source of fear, anxiety, or disgust that results in lesser motivation to carry out financial planning.
How to know if I am financially literate?
Now that you have (hopefully) gained an understanding of what financial literacy is, you might be more confident to ask if you are among the financially literate.
Perhaps you are already financially literate or you’re halfway there but you’re just not sure how to gauge the level of your financial knowledge?
Here are some questions you can think through and give yourself some honest answers:
- Do you know how to create a monthly budget that includes your basic expenses, bills, debts and savings?
- Are you currently debt-free? If not, are you paying them off actively or has it turned into arrears?
- Do you know about how much money you will need to cover your living expenses for a period of 3 to 12 months?
- Do you have a stable emergency fund that allows you to get through an unexpected life event like a layoff without having to borrow money?
- Do you have an understanding of how compound interests work in growing money in investments?
How to improve financial literacy on my own?
Were you able to answer yes to all or some of those questions? If so, that’s great!
If not, you’re probably a sensible teenager who has just transitioned into independence or you’re a rational adult who has just taken the first step to build your financial knowledge, seeing as you have taken the time to read through this long post.
Before you go on, just to be really honest here, it is almost impossible to achieve financial literacy in a matter of a day or two.
What matters most is that you are consistent with your actions and you will surely reap the benefits in the long term.
But don’t worry, you don’t need an economics degree and you can definitely do it on your own. Now that there’s an abundance of financial information available online, it’ll be so much easier to achieve financial literacy.
Here’s what you can do:
Change your mindset about money
Those who find themselves frequently engaging in negative self-talk tend to be more stressed. This is in large part due to the fact that their reality is altered to create an experience where they don’t have the ability to reach the goals they’ve set for themselves.
Your mind is what controls your actions. Most of the time, the things you did that you consider your best work start from having a positive mindset which motivates you to work through the process.
On the contrary, the feeling of fear and negativity are what stops you from taking actions.
Most of the people think of money as a source of fear and anxiety. With that, they often have little to no improvements to their lifestyle financially due to the belief that they will never be able to manage their finance well and build wealth.
If this relates to you, then before you let that fear develop into chrometophobia (fear of money)—yes, it is a medical condition—here are some practical ways to help you build a positive money mindset.
Read financial magazines and online resources
Magazines and online resources are a good source of up-to-date information that has been packaged for general readers like you if you prefer reading shorter articles and texts.
You can check out magazines like Fortune and Financial Times, or the numerous personal finance blogs out there (like mine).
Some other online resources that I personally refer to are Investopedia, Nerdwallet, and ChooseFI.
Dive into books.
Because online publications often have so many pieces of information scattering around, it can be overwhelming for beginners who may be confused about where to start.
In that case, the books can be a great place to get you walking through the basics with a clear sequence already laid out for you.
You may want to dedicate about 15-30 minutes a day to reading books about managing money.
Listen to money podcasts
Perhaps dedicating the time to read can be challenging when your days are already occupied with work and family.
If that’s the case, podcasts will be perfect for you.
There are so many good ones out there that you can listen to on your way to and from work, while doing chores, or even while working out (that’s what I do).
And the best thing?
It’s free! So long as you have a computer or device with access to the internet.
While the corona pandemic is putting off seminars and other forms of public education, many webinars have surfaced and are trending upwards.
There are many financial webinars you can enroll in for free.
Most of it are live webinars that can vary in length from 30 minutes to 2 hours (or more), and attending live webinars will often give you the benefit of asking questions—usually through a chat box—during their Q&A sessions at the end so if you’re a shy person, don’t worry about having to speak when you’re asking questions.
Learn from personal finance videos on YouTube
If you are more of a visual learner, there are many creators out there who work hard to create educational videos for visual learners like you.
Just look it up on YouTube and you’ll find tons of videos you can learn from.
Take financial literacy courses
If you prefer a more professional and structured approach, you may want to consider taking a financial literacy course—whether it’s a course online, in college, or at an adult education center.
Now, It can be tempting to try to fill in the knowledge gap between where you are and the threshold of being financially literate quickly by rushing through books after books or podcasts after podcasts.
But remember—consistency is the key—always start small and slow and then build up gradually as you gain momentum.
With an endless carousel of financial products available today, being financially literate leaves us knowing the best financial products to choose and how our money is working to our expected outcomes in the future.
Now that you have an overview of what financial literacy is, planning and working towards financial literacy should be easier.
Though it will still require time and effort on your part, it is definitely doable and will no doubt benefit your financial wellbeing in the long run.
What do you think about financial literacy? What are the ways you’re doing—or have you done—to improve your financial literacy? Let me know in the comment sections below!