What is Financial Literacy: A Super Simple Beginner's Guide to Managing Your Finances - Investadisor (2024)

What Are The Benefits and Advantages Of Personal Financial Literacy

1. What is financial literacy definition?

Financial literacy is defined as the possession of financial skills and knowledge that allow for informed and effective money management. In other words, being financially literate is having the ability to make healthy financial decisions regarding debt, credit, saving, budgeting, spending, and investment.

2. What is personal financial literacy?

Personal financial literacy is the possession of skills and knowledge on financial matters to confidently take informed and effective actions that best fulfill an individual’s personal goals.

To be financially literate at a personal level means knowing how to spend your money and save responsibly, how to borrow, how and where to invest, and planning for retirement.

3. Why is financial literacy important?

There are many incredible benefits that come with being financially literate. Basic financial literacy is important because it enables you to make smart decisions regarding budgeting, saving, debt, credit, investing, interest, taxes, retirement,and many other aspects of personal finance.

When you’re financially literate, you have the ability to manage your finances so that you can achieve your financial goals. Without basic financial literacy, it’s nearly impossible for a person to manage their finances effectively.

The consequences of financial illiteracy can become catastrophic. For instance, one can easily become a victim of predatory lending, high-interest rates, subprime mortgages, and fraud, potentially resulting in massive debt and bankruptcy. Read financial Literacy Books to improve your financial knowledge and skills.

In the U.S., nearly two-thirds of Americans can’t pass a basic test of financial literacy because of the following reasons:

•Nearly 25% of Americans have no emergency savings
•Credit card debt has hit an all-time high; the total U.S. consumer debt stands at $13.86 trillion.
•About 22% of Americans have less than $5,000 in savings for retirement. This means that a significant number of Americans don’t have enough money to retire comfortably.

Generally, being financially literate can mean the difference between financial success and bankruptcy. That’s why it’s important to increase financial literacy through financial education.

4. What are the main components of financial literacy?

The following are the seven key concepts to get a handle on to improve your financial literacy:

Budgeting 101

Budgeting is one of the most important components of basic financial literacy. Creating a sustainable budget keeps you accountable with your money, prevents conflict on how money is used and helps you avoid going into debt.

An important starting point in budgeting is considering your financial goals, net income, and spending so that you’re able to generate a baseline for mapping out. Generally, having a budget in place will help you track incoming cash vs. outgoing cash and decreases the likelihood of overspending.

Basic understanding of interest rates

Interest rates for mortgages, credit cards, and other types of loans can work against you, but they can work for you too. So understanding how interest rates work will help you make smart decisions in regard to borrowing and investing.

Interest rates influence the cost of borrowing, and the return on savings and may provide insight into future market activity. If you want to borrow money, you’ll want to go for the lowest interest possible.

On the other hand, if you want to put your money in an interest-yielding account, you’ll want the highest interest possible. Investing in personal financial education can help you gain a good understanding of how interest rates work and how you can use them to your advantage.

Managing debt

While debt isn’t universally bad, it can cause you financial worries and keep you from achieving financial freedom. Therefore, it’s important to take control of your debt to avoid the dire consequences that come with massive debt.

To get out of debt, ensure your monthly payments outweigh your credit card use and the interest charged.

Also, find ways to increase your income and reduce your expenses. When repaying debts, be sure to consider interest rates, long-terms costs as well as the benefits of the loans. If you’re having trouble managing your debt, you may want to increase financial literacy through financial education.

Saving

Saving money is incredibly important as it comes with many proven benefits. Along with enabling you to make big purchases, saving helps you to cover unexpected expenses. The future is always uncertain, and you can never know which unexpected expenditure will come your way.

It could be an expensive medical bill, sudden loss of income, unexpected car repairs, and many other emergencies.

Additionally, saving money can help you avoid debt, reduce your financial stress, and provide you with a greater sense of finances. Saving money takes discipline and a certain amount of sacrifice. With the help of financial literacy resources, you can develop better saving habits.

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Understanding identity theft

Identity theft, also known as identity fraud, happens when someone obtains your personal or financial information without your permission and uses it to commit fraud. Identity theft is the fastest-growing crime in the U.S. Due to so many people who have made their personal and financial information available online.

In 2019, 14.4 million consumers became victims of identity fraud in the U.S. Identity theft can take a serious toll on your finances, reputation, credit, and emotional well-being.

Typically, identity theft happens through data breaches, unsecure browsing, and dark web marketplaces. Also, malware activity, credit card theft, mail theft, phishing and spam attacks, and mobile phone theft, among many other ways.

As a result, it’s important to increase financial knowledge by using various financial literacy resources to avoid being a victim of identity theft.

Seeking financial help

One of the aspects of basic financial literacy is knowing when to seek financial help from experts or a loved one who understands financial management.

Many people get into a serious financial mess simply because they either believe that they can tackle financial hardships on their own or don’t realize there’s a problem.

You don’t want to be in a situation whereby you’re overwhelmed by debts to the point of bankruptcy. That’s why it’s important to seek financial advice in regard to budgeting, debt management, taxes, credit, investing, and saving.

Understanding your credit report

Your credit report is a collection of information about your credit history as reported to the credit reporting agency by your lenders.

Your credit report plays a big role in your financial future as it’s used to generate your credit score. A good credit score allows you to qualify for low-interest rates and receive better insurance rates.

If you have a bad credit score or there are problems with your credit report, you may have trouble getting low-interest rates or getting a lender who will lend to you altogether.

When you understand your credit report, you’ll take the necessary measures to improve your credit score or fix any errors on the report. The sooner you master these basic financial literacy concepts, the better.

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5. Financial literacy benefits that will get you far in life

The following are five benefits of personal financial literacy:

(I) You can make informed financial decisions

First, personal financial literacy allows you to make wise financial decisions in regard to budgeting, spending, debt management, saving, credit, and retirement planning. When you’re not financially literate at a personal level, it’s easy to get intimidated by terminologies for things like investing, debt, mortgages, and taxes.

Here are the ways financial literacy can help you make informed financial decisions:

Budgeting – Being financially literate will enable you to understand how to budget your money so that you can track your spending and avoid wasting money on things you don’t need.

Prioritizing savings – Savings is essential to maintaining a good financial situation. Learning how to save will help you to make sound investments that will improve your financial situation in the future. Beginners need to increase their financial knowledge and save money to secure their future.

Interest rates– Financial knowledge allows you to understand how interest rates for loans, savings, and credit cards work. Having an in-depth understanding of interest rates will save you money in the long run.

Debt management– When you are financially literate, you’ll manage your debt in a manner that does not spiral out of control. You’ll know how to compare loan terms and how to avoid high-interest rates and high credit utilization. If you already have debt, financial literacy will help you to choose the best methods to get out of debt.

Retirement planning – Saving for retirement is a long-term financial goal that requires you to have financial knowledge. When you’re financially literate, you can calculate how much to save and devise strategies that will help you get there.

(II) Financial knowledge helps us to prepare better during times of emergency

Emergencies such as medical bills, loss of a job, and an unexpected car repair can put you in a financial crisis. Being financially literate saves you from the trouble of borrowing money during emergencies.

(III) Financial freedom

Personal financial education increases your odds of achieving financial freedom. You’ll be able to reach and secure your financial freedom by tracking your spending, managing your debts, and prioritizing saving, all of which are the primary concepts of financial literacy.

(IV) Tax planning

Personal financial literacy improves awareness of how to save on taxes through tax planning. You’ll understand tax deductions, tax credits, and strategies to ensure tax efficiency. Moreover, basic financial knowledge will enable you to choose insurance plans that will protect you and your assets.

(V) Negotiation skills

Financial literacy enhances negotiation skills when purchasing big-ticket items like real estate transactions/business purchases. When you are financially literate, you can get the best deals when making big purchases or selling something.

6. How to Get Personal Financial Education

You can get financial literacy education by reading personal finance books. No matter your age, profession, or financial situation. You can teach yourself financial literacy and start making better money decisions moving forward.

The following are some of the best financial education books for beginners.

The millionaire next door– This book was written by Thomas J. Stanley and William D. Danko talks about the accumulation of wealth by regular people. Who use the wealth to cushion themselves and their families during hard times and to plan for a comfortable retirement.

Rich dad poor dad– This financial education book by Robert Kiyosaki and Sharon Lechter offers personal finance education. This book could help you learn about cash flow, investing, real estate, and entrepreneurship.

The total money makeover – Dave Ramsey’s all-time bestselling book explores a proven plan for financial fitness in seven practical baby steps.

•Richest Man in Babylon – Published in 1926, this book by George Samuel Clason dispenses personal financial advice through a collection of parables set 4000 years ago in ancient Babylon.

•Transforming your relationship with money – This is one of the most influential personal finance books. It encourages people to examine their attitudes toward money in regard to generating income, spending, donation, and many other aspects of personal finance.

7. Personal financial education- Financial literacy podcasts for beginners

•Black wealth renaissance – This podcast seeks to normalize black wealth and share helpful resources and tips that are useful in attaining and maintaining generational wealth.

•Couple Money-Tackles how to build your marriage and wealth together.

•Beyond finances– A financial podcast that gives real-life context to practical money rules and the theory of financial advice to help people take control of their personal finances and make better money decisions.

•Popcorn finance– This is an award-winning short-form podcast discussing personal finance matters.

•Money nerd – Teaches people how to pay off debt, save more, and pursue basic financial literacy.

•Redefining wealth– This podcast by Patrice Washington encourages people to chase their purpose in life and find fulfillment, not just money and material possessions.

8. Difference between financial education and financial literacy.

Financial literacy is possessing a set of skills and knowledge that allows you to make good financial decisions. On the other hand financial education is having an understanding of how financial resources work.
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9. Who is affected by financial illiteracy?

Financial illiteracy affects anyone who doesn’t possess the skills and knowledge to make effective financial decisions. Financial illiteracy affects people of all ages and socioeconomic levels. It has huge long-term financial implications for the individual or family.

10. When is financial literacy month?

April is the national financial literacy month in the U.S. It’s the month to review and improve personal finances.

11. Why are people financially illiterate?

The main reason why people are financially illiterate is that they don’t make their financial well-being a priority. Such people do not make an effort to learn about investing, saving, budgeting, and other essential components of basic financial literacy. This happens due to a lack of discipline, complacency, and fear of the unknown.

Conclusion for financial literacy

Basic financial literacy is the difference between being in a vicious cycle of financial problems and achieving financial freedom. The good thing is that it’s never too early or too late to become financially literate. Start today by utilizing the financial literacy resources available to become financially literate.

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