What is financial literacy? It's the possession of certain skills that enables an individual to take proper care of the financial resources and invest in right assets to compound one's wealth. What does financial literacy mean?
Effective management of financial resources
Proper management of debt
Accurately calculating the risk in any investment
Understanding the power of compounding
People who earn less, for instance let it be 10k. They say that they dont have enough money to invest or use their skills to invest it, these excuses take these people to where they blame God for their fate. You can either make excuses or become successful.
Financial management doesn't comes with more money, if you can't manage 10k then don't expect yourself to manage 100k.
You start small in anything you do for the first time, start managing your money and you'll see how much you can save by just making notes of your expenses and then cutting off the unnecessary ones.
A person either disciplines his finances or his finances disciplines him.
- Orrin Woodward
Investing properly in anything will give you unexpectedly high returns, let it be investing your time or money. If time is invested in developing a skill and gaining knowledge, you can become a master of it. And if money is invested in assets instead of buying liabilities that seem to be as luxuries then we will be paid the highest returns in terlms of money.
A simple definition of an asset and a liability.
Asset - Anything that puts money in your pocket and appreciates overtime. Eg. real estate, stocks, etc
Liability - Anything that takes out money from your pocket and depreciates overtime . Eg. cars, etc
Albert Einstein reportedly said it. “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”, well there in no record of him quoting this but the achievements he did in his lifespan were an investment to his personality that we give some incredible quotes to his name, isn't it a return to what he invested? Well that's what an investment is.
Regardless of whether Einstein uttered these exact words, the essence of his statement is still immensely powerful and cannot be disputed. For anyone who wants to build lasting wealth, understanding and harnessing the power of compound interest is essential. So, what is compound interest? Well, it is the exponential increase in the value of an investment. Or, more simply put, it is the interest that you earn on your interest.
The earlier you start investing and become financially literate there's more chance of you building wealth than those who just work hard and trade time for money, the one who trades time for money by working on a job cannot make wealth, the one who puts money on the job and makes money from money is the one who becomes wealthy.
The more time you have to build wealth, the more potential there is to reach your goals.
As we are talking about investing early let us take some examples.
Example 1
Bill is 25 years old and has 35 years left for retirement. He starts to invest Rs. 1000 per month for 35 years at a return of 12% per annum. The corpus left with Bill at the end of 35 years will be Rs. 64 lakhs.Jack is 30 years old and has only 30 years left for retirement. He also starts to invest Rs. 1000 per month. But as he has started investing late in his career, he can invest this amount only for the next 30 years at 12% per annum.
The corpus left with Jack at the end of 30 years will be Rs. 35 lakhs. This is the difference 5 years of investment has made to the final corpus value. If Jack needs the same Rs. 64 lakhs for his retirement, he will need to shell out Rs.1830 per month instead of Rs. 1000.
Example 2
Both Bill and Jack are 30 years of age and have 30 years left for retirement. Now, Bill invests Rs. 2000 every month for the first 15 years at a return of 12% per annum.He totally invests Rs. 3.6 lakhs. At the end of 15 years of his investment, he does not invest further and also does not withdraw the money. His total corpus at the end of 30 years will be close to Rs. 55 lakhs.Now Jack invests only Rs. 1000 per month at a return of 12% per annum. But he invests for 30 years. Jack's total investment is also Rs. 3.6 lakhs - same as Bill’s total investment. But his corpus after 30 years is only Rs. 35 lakhs.Thus for the same total investment, Bill’s corpus is much higher than Jack’s corpus. This is because Bill had invested more in the initial years and had allowed this money to get compounded for the total period.
As you begin to save early in your career to start investing, you have lesser disposable cash with you. This helps you in being more prudent and brings about a discipline in your spending habits.
Keep hustling and be positive and do share your opinions in the comment box!
FAQs
People with higher financial literacy can engage in better financial behaviours and investment decisions, such as retirement plans and savings, whereas people with lower financial literacy make poor investment decisions, which negatively influence their finances (Gilenko and Chernova, 2021).
What is the power of financial literacy? ›
Benefits of financial literacy.
Financial literacy can also give you the confidence to explore new investments or take risks that could potentially lead to higher returns on your investments. Lastly, understanding basic finance can help protect you from scams and other fraudulent activities.
Why should financially literate people invest for the long-term? ›
Investing allows individuals to grow their money and receive long-term financial security. However, investing also carries risks as well, as you can lose money depending on the type of investment and changing economic and market conditions.
What is a famous quote about financial literacy? ›
“Financial freedom is available to those who learn about it and work for it.” — Robert Kiyosaki. With Good Good Piggy, children can develop financial literacy and take active steps towards achieving long-term financial freedom.
Is investing part of financial literacy? ›
Financial literacy is about understanding concepts like budgeting, building and improving credit, saving, borrowing and repaying debt, and investing—and having the ability to apply them to real-life situations.
What are the five principles of financial literacy? ›
This article will explore the five basic principles of financial literacy: earn, save & invest, protect, spend, and borrow, providing you with actionable insights to enhance your financial knowledge and make the most of your resources.
What are the four pillars of financial literacy? ›
Financial literacy is having a basic grasp of money matters and its four fundamental pillars: debt, budgeting, saving, and investing. It's understanding how to build wealth throughout one's life by leveraging the power of these pillars.
What is the golden rule of financial literacy? ›
Spend less than you earn
This is when 50% percent of your after-tax income goes toward needs; 30% toward wants; and 20% toward savings or debt repayment. This is a simple, excellent way to budget your money. To be clear, though, needs are bills you must pay such as mortgage/rent, car payments, and groceries.
Why is financial literacy so important? ›
A strong foundation of financial literacy can help support various life goals, such as saving for education or retirement, using debt responsibly, and running a business. Key aspects of financial literacy include knowing how to create a budget, plan for retirement, manage debt, and track personal spending.
What are the three most important aspects of financial literacy? ›
Three Key Components of Financial Literacy
- An Up-to-Date Budget. Some tend to look at the word “budget” as tantamount to the word “diet,” but at its most basic, a budget is just a spending plan. ...
- Dedicated Savings (and Saving to Spend) ...
- ID Theft Prevention.
Whether it's lack of knowledge about banking, credit cards or ways you might become a victim of financial fraud, financial illiteracy could leave you with unnecessary fees, a low credit score and difficulty borrowing money.
Does being financially literate help you increase your wealth? ›
With proper budgeting, individuals can optimize their spending, reduce unnecessary expenses, and increase their savings rate. As a result, they can accumulate wealth more rapidly, which directly impacts their net worth. A solid grasp of financial literacy enables individuals to make informed investment decisions.
What was Robert Kiyosaki's famous quote? ›
The size of your success is measured by the strength of your desire; the size of your dream; and how you handle disappointment along the way.
Why is financial literacy an issue? ›
Lower savings and investments since financially illiterate individuals often lack knowledge to make informed decisions about savings and investing, which can have an impact on economic growth at the national level, and limited access to financial services.
Is financial literacy a problem in the US? ›
In the US, financial literacy is hovering at around 50%, according to an annual survey, with the EU also under-performing. The World Economic Forum's Future of Global Fintech Research Initiative is exploring lessons learned from public-private efforts to advance financial literacy.
How does financial literacy affect financial performance? ›
Managers/owners with financial literacy skills understand business-related financial concepts, including debt, savings, takaful, insurance, and investment, which ensure the good performance of their business.
How does financial literacy affect mutual funds? ›
However, highly literate people intend to sell mutual funds immediately after short-term price appreciation, which could lead to frequent trading turnover. This is consistent with the knowledge bias effect whereby knowledgeable people falsely react to information, contrary to long-term investments.
Does financial literacy affect the economy? ›
Financial literacy, the ability to understand and use various financial skills, plays a pivotal role in the economic development of a country. Its impact on the Gross Domestic Product (GDP) growth is substantial, influencing individuals, businesses, and the overall economic landscape.
Is financial literacy associated with investment in financial markets in the United States? ›
Since financial literacy is significantly associated with investment in financial markets, policy makers could think of implementing financial education programs in the academic curriculum. Early-stage education on financial issues could interest more people in investing in financial markets.
