Financial literacy is the cognitive understanding of financial components and skills such as budgeting, investing, borrowing, taxation, and personal financial management. The absence of such skills is referred to as being financially illiterate.
Being financially literate allows an individual to be better prepared for specific financial roadblocks, which, in turn, decreases the chances of personal economic distress.
Achieving financial literacy is crucial in today’s society due to everyday facets of life, such as student loans, mortgages, credit cards, investments, and health insurance.
Financial literacy is super important because it equips us with the knowledge and skills you need to be financially successful. Without it, your financial decisions will lack a solid foundation for success, and you will not be confident enough to become wealthy.
In a recent report by Standard & Poor’s, Financial Literacy Around the World, the authors seek to answer a question: “How financially literate are people across the globe?” Financial literacy’s importance is clear. An understanding of basic concepts in finance empowers people to make sound financial decisions, and without which can lead to people borrowing more and saving less.
“Financial literacy is a critical barrier to financial and economic participation,” writes the authors of the report. “Because of a lack of knowledge about finance and financial products, many people – especially the poor and women – are not able to access banking and financial services, and are therefore kept out of financial markets.”
Globally, 33 percent of adults are financially literate, or approximately 3.5 billion people.
However, financial literacy is dependent on a number of demographic factors and tends to be lower among women and the poor. About 30 percent of women are financially literate compared to 35 percent of men. In emerging economies, 31 percent of the richest households are financially literate compared to 23 percent of adults in the poorest households.
BENEFITS OF FINANCIAL LITERACY
Financial literacy comes with an assortment of benefits that can improve your standard of living for through an increase in financial stability.
- Ability to make better financial decisions.
- Effective management of funds and debt.
- Greater equipped to reach financial goals.
- Reduction of expenses through better regulation.
- Less financial stress and anxiety.
- Increase in ethical decision-making when selecting insurance, loans, investments, and using a credit card.
- Effective creation of a structured budget.
- Ensures financial solidity, reduce anxiety, and stimulate the achievement of financial goals.
Answering the following questions will help you in ascertaining you financial literacy level.
- How often do you keep track of your expenses?
- How recently have you used credit to pay living expenses?
- How much do you have in all savings and investment accounts?
- On average, what portion of your income is put into savings or investments each month?
- Which asset was by far the most profitable investment historically?
- Savings accounts and money market accounts are most appropriate for:
- Long-term investments,
- Emergency funds and short-term goals or
- Earning a high rate of return?
- If you invest for less than 3 years, which asset category should you avoid?
- What happens if you can’t pay your mortgage?
- Why is compound interest important when investing for the long run?
- What are dividends?
- Which of the following is a guaranteed investment; Gold, Stocks, Savings accounts or Bitcoin?
- Which of the following investments is the most volatile; Stock market, Crypto market (Bitcoin), Real estate market or Gold?
- If you invest in stocks and they go up 10% on average in app. How many years will you double your investment?