Why Financial Literacy Matters

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Financial Literacy is an understanding of the various financial skills, such as personal financial management, budgeting, investing, and applying them effectively.

When you hear the term "financial literacy," what comes to mind?

It seems an overwhelming complex topic, but in fact, it comes down to a few key concepts that everyone can understand and apply in their daily life.

More Important Than Ever

With the rise of digital banking, online investments, and various financial products, our life is more intertwined with digital transactions today than ever before.

In the past, cash is the main way for money management, it was easy to know how much you have, how much you spend, and how much you save, everything is tangible and visible by peaking out your wallet.

But now, with the digitalization of money, it is easy to lose track of your finances. You can not imagine how Walter Cavanagh manage his 1,497 credit cards, and how he can keep track of them all. By average, Americans have 4.8 credit cards, and it is not uncommon to have multiple bank accounts, investment accounts, and other financial products.

All financial digital products are originally designed to make our life easier, but they also make it harder to keep track of our finances. Improve financial literacy is the new key in a modern life, and it is more important now than ever.

It is so important to teach young generations about financial literacy, many schools and universities have started financial literacy programs to help students understand the basics of managing money, budgeting, saving, and investing. Also, US federal goverment has a dedicated department called Financial Literacy and Education Commission to help all citizens learn about financial literacy.

What are the Key Concepts?

Overall, financial literacy is about understanding how money works, how to manage it effectively, and how to make informed financial decisions.

To achieve this, we only need to focus on three key specific concepts:

1. Budgeting:

   1. Budgeting is to create a plan to spend your money for a period.
   2. You need clarity of your cashflow first to make an effective plan.
   3. The main challenge of making a budget plan is to balance between maintaining a life style and achieving financial goals.
   4. Sticking to a budget plan requires discipline and consistency.

2. Saving:

   1. The act of setting aside money for future use.
   2. Every responsible indivdiual has to safegard the future.
   3. Depending on life stage, it can include
      1. Building an emergency fund
      2. Saving for retirement
      3. Saving for a specific goal like a vacation or a new car.

3. Investing:

   1. The process of putting your money to work to earn a return.
   2. Only after you have enough savings.
   3. This can include stocks, bonds, mutual funds, real estate, and other investment vehicles.

These three concepts are the foundation of financial literacy, and they are interconnected. Budgeting helps you identify how much you can save, and saving provides the funds you need to invest. A healthy financial life requires a balance of all three.

tip

The most important keyword in financial literacy is balance. However, the most important keyword in investment is compound.

With a good balance of budgeting, saving, and investing, you can go far well to achieve financial freedom and security. It is often in an accelerated pace rather than a straight line, so you need to be patient and consistent.

How to Enhance Your Financial Literacy?

Here are some pracitical life tips that are applicable to everyone:

• Use a flexible finance tracker to keep track cashflow, budget and savings in your own way.

  1. Learn how to categorize transactions and gain insights from your financial data.
  2. Set up one or more budget plans and stick to them.
  3. Track your savings and investments, and review them regularly.

• Adopt the well known 50/30/20 rule (read here):

  1. 50% of your income should go to needs (essentials like housing, food, and transportation).
  2. 30% should go to wants (non-essentials like entertainment and dining out).
  3. 20% should go to savings and debt repayment.

• Pay Yourself first:

  1. Treat your savings as a non-negotiable expense.
  2. Set up automatic transfers to your savings account as soon as you receive your paycheck.

• Pay off high-interest debt first:

  1. Focus on paying off high-interest debt first, such as credit card debt.
  2. Use the snowball or avalanche method to pay off debts systematically.

• Check Your Credit Report Regularly:

  1. Review your credit report at least once a year to ensure accuracy.
  2. Dispute any errors you find, as they can negatively impact your credit score.

• Invest Your Future:

  1. If your employer offers a 401(k) retirement savings account, be sure to sign up and contribute the maximum to receive the employer match.
  2. Consider opening an IRA and creating a diversified investment portfolio of stocks, fixed income, and commodities
  3. Diversify your investments to reduce risk.
  4. Consider low-cost index funds or ETFs for long-term growth.

• Stay Informed:

  1. Read books, articles, and blogs about personal finance and investing.
  2. Follow reputable financial news sources to stay updated on market trends and economic news.
  3. Attend workshops or webinars on financial literacy topics.

Conclusion

Financial literacy is not just about understanding financial concepts; it's about applying them in your daily life to achieve financial security and freedom. By focusing on budgeting, saving, and investing, you can take control of your finances and make informed decisions that will benefit you in the long run.

If you want to enhance your financial literacy, start by tracking your finances with a flexible finance tracker like Fina. It can help you gain insights into your financial habits, set and stick to budgets, and achieve your financial goals.