Financial literacy refers to the ability to understand and apply different financial skills effectively, including personal financial management, budgeting, and saving. Becoming financially literate involves learning and practicing a variety of skills related to budgeting, managing and paying off debts, and understanding credit and investment products.
People who are financially literate are generally less vulnerable to financial fraud. A lack of financial literacy can lead to poor financial choices which can have negative effects on an individual’s financial well-being.
IMPORTANCE OF FINANCIAL LITERACY
Financial literacy is important due to the following reasons :
- The lack of financial literacy can lead to a number of pitfalls, such as accumulating unsustainable debt burdens, either through poor spending decisions or a lack of long-term preparation.
- Financial literacy can help a person to choose the best methods to get out of debt, either on his own or with the help of financial products such as debt consolidation loans or balance transfer credit cards.
- It has a broad range of implications for the economy, and improvement in it can lead the way to a global economy.
KEY PRINCIPLES OF FINANCIAL LITERACY
Being financial literate means understanding the following 5 components, namely –
- How much you earn, including your pay, benefits and tax withholdings
- How to save and invest, including creating an emergency fund and setting aside money for both short- and long-term goals
- How to protect your money by buying insurance and knowing how to avoid fraud
- How to spend wisely through budgeting and comparison shopping
- How to borrow money at the lowest possible interest rate, and how to keep your credit strong with responsible repayment habits.
HOW TO BUILD FINANCIAL LITERACY ?
Developing financial literacy is very important as it helps in improving personal finance management. The following strategies can help an individual in building financial literacy :-
- CREATE A BUDGET – Income & expenses should be tracked on a monthly basis for segregating necessary and unnecessary expenses.
- MANAGE BILLS – It is very important to manage the bills promptly . This can be done by setting up payment reminders to stay on top of monthly bill payments, making timely payment of bills, choosing auto debit options for recurring bills from the bank account.
- MAINTAIN A GOOD CREDIT SCORE – Having a good credit score will help in getting the best interest rates on credit cards and loans. Therefore, aim to maintain a good score that will help in the case of borrowings.
- MANAGE DEBT – Financial literacy can be improved by managing debt by reducing spending and increasing repayments. A debt reduction plan can help in reducing the liability. For example, paying off loans with high interest rates first.
- START SAVING AND INVESTING – One should have a good strategy for identifying financial goals, segregating them as short, medium and long term goals and investing by consulting a financial advisor. Systematic savings and investment plans can help an individual in generating significant returns.
Thus, in a nutshell, Financial literacy focuses on the ability to manage personal finance effectively, which requires experience of making appropriate personal finance choices, such as savings, insurance, real estate, college payments, budgeting, retirement and tax planning etc.