Definition of Financial Literacy:
Financial literacy is the education and understanding of knowing how the money is made, spent, and saved, as well as the ability and skills to use financial resources to make decisions. These decisions include the knowledge of making appropriate decisions about personal finance such as investing, real estate, insurance, paying for college, retirement, budgeting and tax planning.
What is The Meaning of Financial Literacy?
What is the exact definition of financial literacy? This concept can be applied to both individuals and organizations. Individuals must be able to balance a checkbook, understand personal income taxes and understand the concept of budgeting to make informed decisions with money. These skills are of vital importance. However, many people do not have this basic knowledge and are therefore unable to cope with their daily expenses.
Businesses, on the other hand, need to have a management that includes financial statements, production schedules, cost sheets and many other types of reports to make decisions about the future of the company.
Example of financial literacy
Amanda earns $ 300 a month. His monthly expenses, including utilities and household bills, are about $ 150. Of the remaining $ 150, she pays $ 75 for her monthly subscription to a sports club offering many services that she does not use entirely. She also uses the remaining $ 75 to buy luxury items, including designer clothes. This means that at the end of the month, there are no savings left for unexpected liabilities she may incur.
Having a short-term vision, her financial management seems perfect because she is able to cope with all her expenses and daily needs. However, in the long run, this is clearly inappropriate as it does not realize any savings for the future. This means that her income will always be $ 100 and she will never have the opportunity to spend more than she currently does unless she decides to move to a job with a higher income.
If she learned to better manage her finances, she could buy the items she needed and save enough money for rainy days.
Although Caroline may well start learning to manage her budget, she can not be considered financially literate. To be truly literate, you need to understand financial concepts such as the time value of money, compound interest, and debt management. By understanding these concepts, you should be able to make informed decisions about personal and business finance related to investing, real estate, college loans, retirement, and insurance.
BREAKING DOWN Financial Literacy:
Financial literacy also involves mastering financial principles and concepts such as financial planning, compounding, debt management, cost-effective saving techniques, and the time value of money. Lack of financial literacy can lead to poor financial choices that can negatively impact an individual’s financial well-being. As a result, the federal government created the Commission on Financial Literacy and Education, which provides resources for people who want to learn more about financial literacy.
Building the skills to create a budget, tracking expenses, learning debt repayment techniques, and effective retirement planning are the key steps in financial literacy. These steps may also include tips from a financial expert. Education on the subject involves understanding how money works, creating and achieving financial goals, and managing internal and external financial challenges.
Financial Education’s Importance:
Financial literacy helps individuals become self-sufficient so that they can achieve financial stability. Those who understand the subject should be able to answer several questions about purchasing, for example, if something is needed, if it is affordable, and if it is an asset or a liability.
This field shows the behaviors and attitudes of a person towards the money that applies to his daily life. Financial literacy shows how a person makes financial decisions. This skill can help a person develop a financial roadmap to identify what they earn, spend and what they owe. This topic also concerns small business owners, who contribute greatly to economic growth and stability.
Financial illiteracy affects all ages and all socio-economic levels. Financial illiteracy means that many people are victims of bad loans, subprime mortgages, fraud and high-interest rates, which can lead to bad credit, bankruptcy or foreclosure.
Lack of financial literacy can lead to heavy debts and bad financial decisions. For example, the advantages or disadvantages of fixed and variable interest rates are easier to understand and knowledgeable concepts in determining whether you have financial literacy skills. According to research data from the Financial Regulator, 63% of Americans are illiterate financially. They do not have the basic skills needed to reconcile their bank accounts, pay their bills on time, pay off their debts and plan for the future.
Financial literacy education should also include organizational skills, attention to detail, consumer rights, technology, and the global economy, as the state of the global economy has profound implications for the economy. American economy.
Financial literacy means the ability to understand and know how money works in business and in personal life.