What is financial literacy
Financial literacy is the cognitive understanding of financial components and skills such as budgeting, investing, borrowing, taxation, and managing personal finances. Lack of such skills qualifies as financial illiteracy.
Key Components of Financial Literacy
Financial literacy consists of several financial components and skills that enable a person to gain knowledge about effective money and debt management.
Below are the main components of financial literacy that should be learned.
1 Budgeting
When budgeting, there are four main uses of money that determine it: spending, investing, saving, and giving away.
Creating the right balance between the main uses of money allows people to better distribute their income, which leads to financial security and prosperity.
In general, the budget should be designed to pay off all existing debt, leaving money for savings and profitable investments.
2 Investment
To become financially literate, a person must learn about the key components of investing. Some of the components that should be learned to ensure favorable investments are interest rates, price levels, diversification, risk reduction and indices.
Investments
Learning about critical investment components allows people to make smarter financial decisions that can lead to higher income inflows.
3 Borrowing
In most cases, almost everyone needs to borrow money at some point in their lives. Understanding interest rates, compound interest, the time value of money, repayment periods, and loan structure is critical to effective borrowing.
If the above criteria are sufficiently understood, an individual's financial literacy will increase, providing practical advice on borrowing and reducing long-term financial stress.
4 Taxation
Gaining knowledge about the various forms of taxation and their impact on a person's net income is critical to gaining financial literacy. Whether it's employment, investments, rent, inheritance or contingency, each source of income is taxed differently.
Paying taxes
Being aware of different income tax rates ensures economic stability and enhances financial performance through revenue management.
5 Personal finance management
The most important criterion – personal finance management – includes the combination of all the components listed above.
Financial security is achieved through a balanced combination of the financial components listed above to strengthen and increase investment and saving while reducing borrowing and debt.
Achieving in-depth knowledge of the financial components discussed above guarantees an increase in the financial literacy of a person.
The Importance of Financial Literacy
Getting financially literate is one of the most important things a person can do to ensure long-term financial stability.
Listed below are some real facts that should highlight the overall importance of achieving financial literacy.
- It is estimated that about 85% of many users live paycheck to paycheck.
- More than 50 million people own credit cards lately.
- On average, credit card holders have about four cards each.
- Credit card debt is at an all-time high of 3.04 trillion conventional units.
- In general, the current debt is approximately 12.58 trillion conventional units.
The statistics above should shed some light on why financial literacy is paramount in today's financial climate.
The Benefits of Financial Literacy
Financial literacy is a skill that provides a range of benefits that can improve people's living standards by increasing financial stability.
The following are the benefits of financial literacy:
- Ability to make better financial decisions
- Effective money and debt management
- More opportunities to achieve financial goals
- Lower costs through better regulation
- Less financial stress and anxiety
- Improving the ethical level of decision-making when choosing loans, investments and using a credit card
- Efficient creation of a structured budget
Taking steps towards financial literacy is an important component of life that can provide financial stability, reduce anxiety, and stimulate the achievement of financial goals.