Why is Financial Literacy Important?

Most British people reach financial independence in their early twenties or even as soon as their late teens. This is the period in life when young adults move out of their parent’s homes, acquire student loans, and get their first real jobs. However, many people face extreme difficulties when they delve into adulthood, which may result from their lack of financial literacy.

Financial literacy is part of the secondary school curriculum in the U.K, mainly within maths and citizenship. However, the United Kingdom ranks below the OECD average concerning financial and monetary literacy, according to the OECD/INFE 2016 Survey of Adult Financial Literacy. This may explain why many people struggle with managing their finances or saving sufficient emergency funds.

The stats are concerning. Without the basic knowledge of finance, many Brits may face the possibility of future financial difficulty and hardship. Therefore, it is essential to know why financial literacy is important and the available resources to learn more about it.

What is Financial Literacy?

Woman holding calculator and bills.

Financial literacy means having sufficient knowledge about personal finance to make decisions about spending and budget allocation. It refers to anything from saving to investing opportunities, loan repayment, credit, and defaults.

The meaning of financial literacy does not necessarily refer to knowing all textbook formulas and explanations by heart. Instead, it translates to the basic financial transactions that an individual may face in their everyday life. For example, tracking your spending and identifying expenses can mean you already have a general understanding of personal finance. However, your literacy level may be higher if you can, for example, calculate how much you need to save to pay for your toddler’s college education.

Having a high salary may not always correlate with being financially literate. Many people with higher earnings are sometimes not economically literate. Conversely, lower earnings do not necessarily mean a lack of personal finance knowledge. Financial literacy can apply to and benefit anyone, regardless of their income level.

Benefits of Financial Literacy

Financial literacy will not only add to your general knowledge but can also help you make life-changing decisions. Here is a summary of some of the possible advantages of financial literacy and how they may help form healthy financial habits.

More Control Over Personal Finances

Financial independence may not be beneficial if you don’t also know how to manage your spending properly. People have different priorities when it comes to spending. However, financial literacy can prevent you from overspending on unnecessary items. Instead, the extra money can be invested or saved to ensure financial stability in the future.

Let’s have a look at it from a short-term perspective. For people who receive fixed salaries every month, spending most of it in the first few days can be tempting. They may not even notice how quickly that money runs out, leaving them with no funds for the end of the month. But suppose you know the basics of personal finance. In that case, you may be able to allocate your expenditures proportionally, save some for emergencies, and not have to worry about the lack of cash until the next paycheque.

Choosing the Right Lenders

Individuals having a financial meeting.

Another component of financial literacy is determining which assistance opportunities would be best for you. Turning to the right loan or cash advance options when you need financing is already a step in the right direction.

Learning about finance also includes getting acquainted with the sources of acquiring it. You can get to know different types of loan options and which ones you could qualify for. It’s also important to understand what loan types could most benefit your current economic situation. Thus, you can avoid biting off more than you can chew and create a financially healthy environment for your future.

Increase Amount of Saving

Individual calculating finances on laptop.

Robert Kiyosaki in his “Rich Dad, Poor Dad,” says, “It’s not how much money you make. It’s how much money you keep.” His main lesson is that your income does not have any value if you don’t have anything left at the end of the day. However, the concept of saving extends to a lot more than just setting aside a portion of your salary every month.

Following Kiyosaki’s advice of “keeping money,” it can be advantageous to allocate money to an emergency savings fund.  For example, imagine if you lose your job or a global recession hits; how long would your savings keep you on your feet? By setting money aside to an emergency fund first, you can ensure your security.

When it comes to saving, there are many different paths you can follow. Get to know what kind of savings accounts there are and choose the one that would be the easiest to manage. Here are some common types of savings accounts:

  • Traditional Savings Account -allows you to earn a little interest and can be opened at almost any bank or credit union. Most of the time, you can withdraw money from these accounts up to six times a year without facing any penalties.
  • High-Yield Savings Account – typically offer higher yields than traditional accounts.  Online banks usually attract depositors by offering lower deposit requirements and minimum fees.
  • Certificate of Deposit Account – provide the opportunity to deposit your funds for a set period. After the agreed period ends, you can withdraw your money with the accumulated interest (usually above-average) or re-deposit them to the account to grow your funds.
  • Specialty Savings Account – dedicated to special occasions such as college tuition, Christmas Club, kids’ savings, etc. The savings are narrowed down to specific goals and are separated from other savings accounts.

Investing In the Right Assets

Individual holding cellphone investing.

Investment opportunities are vast, but not all of them are going to make you wealthier. With enough money, you may be able to invest in everything equally. Some will pay off, but it is crucial to keep in mind that losses may overshadow your gains. Portfolio diversification can be a good idea. But to do it properly, you need to know what financial literacy is and why it is important.

A financially literate person has a general understanding of how stocks, bonds, and real estate work. By keeping up-to-date with the recent news, you can distinguish between high-risk and low-risk investments. As a result, you can spot the opportunities, take advantage of them, and refrain from the ones that can lead to insolvency.

Kiyosaki also states that rich people buy assets, while the poor and the middle class acquire liabilities. By assets, he refers to those things that the buyer can later sell at a higher price. Financial literacy can contribute to a better understanding of asset acquisition and utilisation.

Preparing for a Comfortable Retirement

Financial literacy can help you look toward the future with goals and plans. Retirement may be too far away, especially for people who are just starting in their careers. But the sooner you start thinking about it, the better off you may be when you decide to retire.

Finding out more about retirement may eventually lead to worrying less about it. You can organise your retirement savings in a way that won’t hurt your daily lifestyle. There are a wide number of retirement plans from which to choose. By gaining some insight into personal finance, you can build a retirement plan that will put you in the best position in the coming years.

How to Become Financially Literate

Individual writing in notebook in front of laptop.

There are many opportunities for people of all ages to educate themselves in personal finance. Thanks to the Internet, online courses are probably the quickest way to learn, but many skills are also learned through practice. These options can help get you started on your journey toward financial literacy:

  • Make the most of free resources. Always keep an eye on and study your monthly credit card spending. No extra skills are needed for this. You can get your payment history every month from your bank for free. Take time to closely monitor your earnings and expenditures, as well as your balance. A detailed look at your finances can help you better understand your spending habits. And being aware of your spending may help you work towards improving your finances.
  • Read books. Books are the oldest and, to this day, one of the most effective sources of knowledge. Go to a library or a book shop and pick out financial books for beginners. Dedicating 15 to 20 minutes a day to reading is a great way to start gaining more financial knowledge. If you’re looking for recommendations, Vicki Robin’s “Your Money or Your Life” and Grant Sabatier’s “Financial Freedom” are very accessible for starters.
  • Take courses. The Internet is filled with many online programs that can boost your personal finance proficiency. There are tailor-made courses for both teenagers and adults. You can have a deep look through and see which courses would be best for your knowledge level and schedule.
  • Download and use personal finance apps. A beneficial way to track your spending is by linking all your bank accounts and credit cards. Personal finance apps will track your spending and let you gain insight into your investment portfolio and bill payments. Mint, Personal Capital, and EveryDollar offer due to date reminders and provide platforms for budgeting.
  • Listen to podcasts. As an alternative to reading books about personal finance, you can learn by listening to daily podcasts on your smartphone. You can listen to them on your way to work or school. Many podcasts are explained in simple terms with practical examples, and most are offered for free!
  • Subscribe to online magazines. While books will help you enrich your knowledge with the basics and the definitions of certain personal finance concepts, magazines and publications provide you with the latest news. By learning the latest trends and changes in those financial markets that you directly connect with, you will constantly be up to date. Check out Kiplinger, Financial Times, and Fortune.
  • Stick to the 50/30/20 rule. One of the first steps you can take to control your financial resources better is to apply the 50/30/20 rule. The rule states that you should dedicate approximately 50% of your monthly income to fixed costs, 30% to necessities such as food and clothing, and 20% to savings and debt repayment. If you can figure out a way to increase your savings without harming other expenses, you’d be in an even better position.

Why Financial Literacy Matters

Happy woman calculating finances.

The risks of following your intuition regarding financial decision-making may, unfortunately, be very high. Making uninformed decisions can potentially cause irreversible circumstances.

For example, Laura, a recent university graduate, lands a new job. She divides a portion of her monthly income into her student loan payments. However, after a few months, Laura begins falling behind on her payments. Due to her increased spending, Laura doesn’t have enough money left in her account. As a result, she turns to friends and lending companies to secure loans for her debt. Unfortunately, Laura is unable to pay off her debts and, eventually, must default on her loans.

Financial literacy could have helped Laura by providing her with the information to create a reasonable repayment plan, savings account, and budgeting system. Financial literacy can improve personal finance decisions and, in turn, save you the trouble of potential hardships.

Financial literacy gives you a ton of confidence and lets you know who to trust. It helps you set your goals cleverly and paves the way for you to reach them. If you feel like you don’t have this confidence over your own money, go ahead and start educating yourself on the matter starting today!