Financial literacy for beginners

What is financial literacy?

Financial literacy involves the understanding and embracing of financial components and skills for oneself. Such components are budgeting, saving, investing, wealth building, and general personal finance management, among others. These are honed through years of practice and attaining new financial skills over time.

Therefore, one cannot stop learning about managing their finances. It is an ongoing process that is refined based on various financial situations. Someone without the said financial skills is understood to be financially illiterate.

Key Points

  • Financial literacy is the ability to understand financial components, skills, and needs for oneself.
  • Children of all ages, and adults must be taught about financial literacy.
  • Financial literacy skills help you plan and stabilize your finances and eventually, life.
  • Most people around the world are financially illiterate.

Impact of financial literacy

Unfortunately, most people across the world are financially illiterate. They, therefore, do not benefit from the positive impact that financially literate individuals enjoy.

Financial literacy is the number one tool that helps individuals understand their economic statuses and prepare for possible future speedbumps that could affect them.

Without it, you are incapable of planning ahead. You are incapable of using your current financial position to prepare for possible future events such as economic recessions, change in financial status, or change in family financial needs.

Households need to prepare for such events, such as when their children go to college or when they retire. These two events have a more significant impact on finances, and when ill-prepared, one could falter under pressure and never recover. That is why financial literacy is a genuine need for everyone.

You, therefore, need financial literacy to manage your income better. You need it to manage your debt, saving, and investments. Overall, financial literacy protects you from stress and anxiety induced by financial problems.

What does financial literacy involve?

Financial literacy has many sides. These all should be implemented to achieve a balanced life – both now and in the future. The aim is to remove financial strain while maintaining a good life that everyone enjoys.

Budgeting

A budget deals with your money. It involves your income, expenses, donations, how much you save, and how much you invest.

Whichever way you earn your money, you must create a balance between what you spend on and what you set aside for the future. That is when financial literacy kicks in. It is not possible to seamlessly allocate your money between expenses, investments, and savings without it.

Therefore, you need a budget to rightly allocate your income among all your needs. There must be an amount set aside for monthly expenses, savings, investing, as well as how much you donate towards charity or your church.

Without a budget, it is impossible to build stable, growing finances.

Dealing with debt

Debt is a real problem across the world. The Reserve Bank of South Africa said that annual growth in household debt as a percentage of nominal disposable income increased from 72.9% in 2019 to 77.1% in 2020.

When being incurred by a financially literate individual, debt can be used to earn more money through investments. However, for financially illiterate individuals, debt is another means of providing for immediate household needs – the basics – which ultimately leads to a dire near to long-term financial situation.

Therefore, financial literacy is used to understand when and how to acquire debt without putting oneself in a disadvantaged position. Also, a financially literate individual borrows on the back of their understanding of the time value of money, not based on current needs alone.

Investing and taxation

Financial literacy isn’t achieved until you learn about investing and taxation. Investing helps you store and create value for your money. Knowing about the different forms of taxation, on the other hand, enables you to protect your income.

For example, earned income is taxed higher than portfolio income. When you know these differences, you make better decisions with your money – save more and earn more.

The bottom line

Several people are financially illiterate, which manifests in how millions of households manage their income. For example, not only do developing countries face lower household savings levels, developed countries, too, face the same problem.

The United States personal savings rate has barely hit 13% since April 2021. In fact, close to 80% of U.S citizens live paycheck to paycheck. Therefore, financial literacy is a vital component of the road to alleviating unstable financial situations among households.