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What is Financial Literacy and Why is it Important?

What is Financial Literacy and Why is it Important?

Learn what financial literacy is and why it’s important for your money. Overview of financial education and how it can completely change your lifestyle.

In today’s world, it’s hard to imagine a scenario in which you don’t deal with finances, either personally or professionally. Whether you’re balancing your checkbook, paying your bills, or planning your retirement, the way you approach money affects many other aspects of your life—including whether you can afford to buy that fancy car or take that exotic vacation you’ve been dreaming of about. In order to make smart financial decisions in the future, it helps to know where things came from in the first place and why they are structured as they are today…

…and most of the time, we need financial education for that.

Financial Education for Financial Literacy

Financial education can be defined as the process of learning how to use and manage your money wisely, with the aim of building wealth and avoiding debt. Depending on your financial situation, you may find that you need to further your education about how to budget, save money, and achieve financial independence, or perhaps you just want to learn how to make the most of your paycheck each month. 

Whatever your reasons for wanting financial education, here are some of the most important topics covered in this type of coursework and why it’s so important to know about them:

  • How does the economy work?
  • How to create a personal financial plan?
  • How to set achievable and realistic goals?
  • How to optimize our budget through the set goals?
  • How to determine what loans are worth taking for achieving our financial goals?
  • What’s the key to successful personal finance management?
  • What is investing?
  • How do you manage investment risk?
  • How to do the financial analysis?
  • What are the effective methods of stock analysis?
  • How to create successful strategies for investing in stocks?
  • How to build a balanced portfolio of assets?
  • etc.

All mentioned are extremely important topics that give you great new and important knowledge. Beware of those

How much do we know about Finance?

The financial crisis of 2008 was a wake-up call for many Americans. But how many people learned anything from it? A 2020 NFCC survey found that:

  • 62% of U.S. adults have carried credit card debt in last 12 months.
  • More than 1 in 4 (27%) admit they do not pay all of their bills on time.
  • Nearly 6 in 10 (58%) find it difficult to minimize their debt primarily due to unexpected financial emergencies (19%) or reduction of income (19%).
  • 16% more U.S adults say their household carries credit card debt from month-to-month than last year (43% vs. 37% in 2019).

In other words, most people have no idea what they are doing when it came to managing their money. And while education has been shown to correlate with higher earnings across all socioeconomic backgrounds, poor Americans stand to benefit most from a stronger financial foundation.

About the importance of Financial Literacy

Financial literacy is generally meant when talking about financial education. The U.S. Department of Treasury has defined financial literacy as

an individual’s understanding of personal finance concepts and knowledge of how to use tools,that help them make responsible financial decisions in life.

The reality is that managing money requires more than just knowing how to handle finances; it’s about knowing how to use them effectively for yourself and your family. For example, if you buy $200 worth of groceries with a credit card when you’re on a strict budget, that’s not good financial management.

Unfortunately, a lot of people don’t learn about personal finance in school. But whether you learned much about money as a kid or not, you can take advantage of your own education by educating yourself. The more financial knowledge you have under your belt, the better off you’ll be—not just now but down the road. 

Can Investing improve your lifestyle?

Investing can mean different things to different people. For some, it’s a way to grow their money so they can spend more on leisure pursuits in retirement. For others, it’s about becoming financially independent, so they never have to work again.

You can definitely benefit from educating yourself about investing. It is an important knowledge and set of skills because it puts your money to work for you. That’s a way better use of your belongings instead of watching your money dwindle away in fees, interest charges, commissions, and inflation.

Can Money teach Financial Literacy?

Money is all around us. We use it to buy food for our families. We use it to buy clothes for ourselves. We use it to do basically everything else in life, so wouldn’t it make sense that we understand how money works so we can keep more of it?

But personal finance and financial literacy isn’t just about making money. It’s also about knowing how to manage what you already have so you can use it wisely.Financial education helps you do both of these things better than ever before.

If you grew up in a wealthy family where your parents handled all of your money decisions for you, understanding personal finance might not be as important to you. But if you grew up like most Americans–with financial problems often leading to arguments between parents and children–you’ve probably got an idea of how important it is to understand personal finance.

To learn more about personal finance and potentially avoid disagreements with your loved ones down the road, be sure to educate yourself on basic personal finance management now. That’s how you will find new tools to make money decisions that are right for you, whether you’re saving up to buy your first car or figuring out how to pay down your debt. It also empowers you to make smart financial choices for your future, no matter what path you take in life. 

TL;DR

While it’s not difficult to imagine why financial education is important, it can be hard to articulate. The point of financial education isn’t to teach you how to make money; after all, there are lots of ways to do that if that’s what you want (and there are some best practices we think everyone should know). Rather, we hope that through learning about investing and saving—and through learning some best practices—you will get a better idea of how your money works.

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