Importance of Financial literacy

23 May 2021

Curtain Hug

Financial literacy is important because it equips one with the knowledge and skill to manage money effectively. Without financial literacy, the actions and decisions one make or do not make with respect to savings and investments would lack a strong foundation. Financial literacy helps in understanding financial concepts better and enables one to manage their finances efficiently. Furthermore, it helps in effective money management, making financial decisions, and achieving financial stability. Moreover, financial literacy provides in depth knowledge of financial education and various strategies that are indispensable for financial growth and success. Also, it enables one to be debt free by adopting the best debt strategies.

One can understand the importance of financial literacy by understanding the four components of financial literacy better. They are:

Budgeting
Budgeting is an essential life skill that helps in acquiring financial knowledge for planning and managing money. It is one of the most important components of financial literacy. It is necessary to keep a tab on one’s spending habits. Optimal money management will help in creating an actionable financial plan. The actionable plan will help in tracking the expenses, segregating the unnecessary ones and help in spending money wisely. This way, one can save more. The thumb rule for budgeting is that income has to be greater than the expenses. The difference between the two (income and expenses) is what helps in stashing up as savings.

Debt
Debt is nothing but one’s borrowing. One is spending money that isn’t theirs. For example, if an individual borrows money from the bank or uses a credit card or takes a short-term loan. All these become part of the debt.

Debt is borrowing money for things that are necessary for making a living. For example, buying a home or paying education expenses. On the other hand, bad debt is borrowing money for unnecessary expenses. For example, using a credit card to buy expensive clothes or electronic gadgets, etc.
Therefore, being able to differentiate between necessary and unnecessary expenses will help an individual from not drowning in heavy debts.

Saving
Saving ensures financial wellness, a secure present and an uncompromised future. One can build wealth in the long term through proper financial planning. Keeping a tab on one’s spending habits will help in saving money. Therefore, through savings, one can easily achieve the following: Achieve important financial goals. For example, full payment of a home loan, kid’s education, and retirement savings.
Create an emergency fund. An emergency fund acts as a cushion during unexpected life events. The fund should have at least six months worth one’s income.
Inculcate financial discipline. Through saving money regularly, one can achieve financial discipline and excel in their life.

Investing
Instead of holding the money idle in a bank account, one can divert it to financial instruments. Investing is all about generating and growing wealth to enjoy a secure and happy future. It is all about putting money in an avenue that will help in generating significant returns over time. Investments will help in generating additional monthly income and significant returns. One can also achieve their financial goals at the same time allocate funds towards retirement saving. Some of the widely used are equities, debt instruments, mutual funds, real estate, and gold.