Financial literacy has seen a steep decline in times, and that’s without putting the global health crisis into account. The changing tendencies in consumer habits and transaction mediums have directly influenced the subject. Previously, cash was the preferred mode of transaction for people worldwide.
But the tide of time has moved on, and today, we seldom use cash to avail goods and services. We have made a subtle transition from offline cash transactions to online payment modes- While there are specific rewards and privileges, the security and convenience factor has come up leaps and bounds.
The Risk Factor
Financial management is a complex subject that demands detailed studying to get an absolute understanding. Despite the modern backdrop, there are plenty among us who are unaware of how the economy functions in society. There is a sense of negligence and reluctance, especially among the millennials, to grasp the financial structure and its true potential.
Such lack of knowledge eventually leads to monitory trouble and penalty payments. A greater understanding of the whole system can help people to manage their finances better. It is undoubtedly a healthy habit to put up with and a life skill that rewards and secures the future.
Financial Literacy: The Definition
A high level of financial literacy allows one to evaluate and manage finances and assets effectively. It can be as normal as budgeting, credit management, investing and others.
Financial literacy helps in managing money proficiently. While it is never too late to improve your financial literacy, it’s essential to gain financial literacy to reach greater life milestones.
A fundamental understanding of finances can help people in making informed, smart calls in life. Such decisive calls will further have long-term repercussion on various aspects of life, such as:
- Cash-Flow Management
- Debt Management
- Real-Estate Purchases And Refinances
- Investing Planning For Retirement
- Tax Planning
- College Education
Financial literacy also allows people to hold in-depth knowledge in monitory chapters such as:
- Compound Interest
- Use Of Consumer Credit
- Time Value Of Money
- Consumer Rights
- Tax-Preferred Savings Vehicles
More and more people slowly realize the finances’ potential, unlike the earlier years when the thought-process regarding money was rigid and primitive. Individuals are improving their financial literacy by each day, which directly results in better decision-making. Industry observers are stating that the average number of financially literate individuals is on the ascendancy, thereby boosting the process’s economy.
Here’s a detailed breakdown of major components that help in understanding the importance of financial literacy.
The main and effective component of financial literacy is budgeting. Budgeting is a simple method of analyzing and evaluating an individual’s economic performance.
It allows the person to keep a tab on his spending habits, rate of saving and incoming funds. It is a highly beneficial exercise that directly contributes to transparent and sound money management.
Such money management can become instrumental in carefully filtering out the unnecessary spending, thereby retaining the leftover, which in other terms can be referred to as savings. The only constant in budgeting is that income must be higher than the expenditure to leverage some savings. An increasing number of people are adapting to budgeting to set a roadmap for their future investments.
If an individual is borrowing resources, money, in this case, to help paying bills, that is debt. People mostly resort to debts when they lack the necessary fund for paying. Again to put it simply, the person is using money that is not his.
The practice is considered civil, convenient and sophisticated worldwide, with almost all banks and financial institutions offering financial loans and credit card privileges, depending upon the free credit report– all such services can be deemed under the same concept.
Despite being a general practice across countries and continents, the concept of debt is largely perceived as a less-than-ideal option for financial management. It directly represents one’s poor financial health, which may hinder purchasing assets such as houses and cars or even the everyday essentials. Credits and banking loans often help out people to pay for what they originally cannot.
But one must understand the distinction between good and bad debt. If a person is borrowing money to buy extravagant life choices, that will be considered a bad debt.
Whereas if someone is taking a short-term bank loan to pay for an education fee, it will automatically fall under good debt. Financially literate individuals will always strive to avoid bad debt while managing their commitments.
Already discussed briefly at the start of the piece, saving can future proof an individual’s lifestyle. It will allow the person to be on a financially stable footing at all times without necessarily opting for compromises when there is any unfavorable challenge or unexpected mishap.
Following a strict budgeting habit will contribute massively to developing long-term assets for the future. Financial literacy and a strong sense of saving can help people achieve major life goals, secure back-up money, and build disciplined spending habits.
Lastly, if an individual is financially healthy and making enough to afford a comfortable lifestyle, his next objective should be to find good investment schemes. While depositing the money in bank accounts is clinically prescribed, one must think of other ways to generate significant returns on their money. Prudent investing can bring in continual income over time if only done properly.
There is also a suggestion for diverting the resources into creating a solid retirement fund for the future. The most common investment methods prevalent in the current financial market are mutual funds, systematic investment plans, debt instrumentals, equities, real estate, and insurances. While there is no limiting on when to start investing, an early head start can be prospective.
Financial literacy is more prominent than ever before, leading to plenty of financial experts declaring it to be the key to success in the upcoming decade. One must critically study the nooks and hooks of financial planning, budget management and savings to gain wisdom and prowess over his finances.