What is financial literacy and why is it important?

Published April 1, 2021   |   

Financial literacy is critical because it equips us with the knowledge and skills that are essential for successful money management. Personal finance can be a fickle thing and if you do not have the educational background regarding proper financial handlings you might end up in the eye of a money storm. Making informed decisions and effective judgements regarding the money you work so hard to earn is something that everyone can benefit from. Additionally, these learnings should evolve with you and your life evolves. What you need to know about money at 18 differs from what is important at 25, and again at 40. Fiscal know-how is not a common innate sense so do not let your hesitation to ask for explanations be the reason that your money moves suffer.

For Understanding Debt

Simply put, debt refers to money that is owed or due to someone who loaned it to you. While the definition is simple, often the repayment is not. Make sure that you have a firm grasp on the different types of debt, what they mean for your overall financial health, and tricks to pay them down as efficiently as possible. Some debts are classified as good while others are classified as bad. Knowing the difference can save you plenty of money over time and can also help you to keep your credit score in check.

Mortgages and student loans are common examples of good debts. Since these debts will likely earn you more than you borrowed over time, this is how they earn that classification. Refinancing these debts can also be a successful strategy and your bank account will start to grow. You can refinance your existing student loan to a new loan with a private lender. In doing so you are likely lowering your monthly payment as well as your interest rate, hence decreasing your total amount owed over time. This strategy can help you to free up cash each month that can be saved or allocated towards other financial goals that you have for yourself.

The process of refinancing is a great example of why financial literacy is so important. Many people take out a loan, receive their terms, and go on autopilot with their payments. While this is not a bad strategy as it supports on-time and in-full payments, it is not going to boost your money into the next level. Understanding that you do not have to forever take something at face value is one of the greatest benefits to come from understanding debt. Refinancing with a private lender is a great way to see this lesson on action because private loan terms are significantly more flexible than the federal ones you might have originally taken out to fund your education. You can even use a student loan refinance calculator so you can know what to expect to pay before you make any final choices regarding restructuring your loans.

For Planning Purposes

Even the wealthiest people in the world operate off of a budget and they also create and maintain financial goals for themselves. Simply depositing money into a savings account is not going to be enough to elevate your financial literacy. Decide for yourself, if even a broad one to start, and determine what is most important to you in terms of how to divvy up your funds. A mortgage, retirement, and family planning are all common big-ticket items that require a specific style of saving.

Retirement savings, for example, is not a one-size-fits-all process. Educate yourself on what means are available to you so you know how to maximize your savings. Employee sponsored 401k’s hold a different set of rules and guidelines than IRA’s will, but no one is going to volunteer this information to you. Instead advocate for yourself and your own financial future by seeking out information regarding every available option. What this will do is help you to create and plan specific to your goals and your funds so you can mitigate the misappropriation of the money you are saving.

For the Kids

Money has notoriously been a closed-door subject. In previous generations, it wasn’t talked about openly and that lead to an entire generation of adults that had to learn everything on their own, but only if they knew they had to learn it.  Financial literacy is popping up in school curriculums all over and for good reason. Helping young adults learn the basics about money gives them a solid foundation of knowledge for when they will have to put that knowledge into action during different stages of life. Building strong money habits early on can help kids avoid many of the mistakes that can lead to life-long struggles. Being given the gift of education and the opportunity to practice the habits and strategies before they are experimenting with their own money also allows students to make mistakes during a time when they are inconsequential and learn from them.

For Financial Defense and Growth

Financial literacy can be a main form of defense against economic events that will impact your finances but remain out of your control. Most recently the COVID-19 global pandemic has undoubtedly affected the financial standings of almost everyone. Financial education will be essential when the time comes to begin the process of economic recovery. With many people having applied for unemployment recently there are many questions about how that will affect their tax returns and other financial standings down the line.

For those who did not have a solid grasp on their personal portfolio going into this crisis, they were left with little defense against the possibility of job loss and having to readjust their budgets quickly and drastically. Uncertainty will always remain as such but with education comes comfort and once the unexpected hits it is typically too late to prepare your finances to handle it. Conversely, it is almost impossible to grow your personal net worth without the proper information to sustain your plan. Simply depositing money into a savings account is not enough. Where financial literacy becomes essential for financial growth is in the understanding of investments, types of savings accounts, and allocation of funds in a way that supports an uptick rather than a plateau.