In this post, we will go through what actually is financial literacy, what it can mean to you and what actionable steps you should perform to achieve it.
In many countries around the world, adults inherit low Financial Literacy these days. They often possess financial attitudes mainly oriented towards the short-term success or instant gratification and thus fail to engage in good financial behaviors that could help them improve their financial security.
What is Financial Literacy?
Well, one can always believe Wikipedia to provide a fair definition of financial literacy
“Financial literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources available. Understanding basic financial concepts like compound interest, debt management, etc allow people to know how to navigate in the financial system. People with appropriate financial literacy training often make better financial decisions and manage money better than those without such training.”
Financial Literacy is now increasingly important. not just for investors or aged people but for every common man and women. It has now been essential for even the average families in any part of the world to learn how to balance its expenses. They should generate sufficient funds for events like their children’s education and marriages and still ensure a pension post their retirement. In 1900’s people were usually responsible for working hard, contributing to countries growth and in return governments would take care of them after retirement through government-funded pension schemes.
However, in the recent years, changes in the pension landscape due to increase in the general life expectancy has increased the medical care and standard of living. Times have changed and you are now needed to be self-responsible for your financial well-being and livelihood. Various financial services have pushed decision-making responsibility to participants or financial consumers. You should now be able to manage your day to day financials and also plan out which luxuries you want to enjoy in your life (aka Financial Goals). Also, the pension funds provided by government schemes are now insufficient and demand people to prepare their personal corpse.
BREAKING DOWN ‘Why Financial Literacy Is Important’
Few popular terms swamping the internet or Advertising market these days are “Financial Investments“, “Financial Planning“, “Risk Assessments“, “Asset Diversification“, etc. Given that the banks and the financial institutions are now able to promote their products day and night through the internet having the best financial investments in place seems a necessity to many people these days. Bars of having a credit card are getting lower, while its interest rates are peaking up. No one wants to be left out whether it is about lavish expenses or intelligent investments. What people like these days is to own the next shinning piece of stock or a mutual funds that could only skyrocket their net-worth. However, most of the people dream of future and forget to live in present.
Growing sophistication in financial markets has allowed producers to offer a variety of complex financial instruments along with wide range of options to mix things within these products. You as an individual are increasingly expected( but are not asked) to take on the sole responsibility for the risk that comes along with these complex financial instruments.
If you do not end up choosing the right savings plan or investments for yourself and your family, you are open to the risk of fraud or underperformance. This would be breaking your financial success unknowingly only to find out its consequences much later in life. Not just the youngsters, but even the middle-aged people struggle to make knowledgeable decisions on matters affecting their financial well-being.
Most of the jobs in IT industries have got too demanding. With the internet and other communication methods coming in, you are now needed to be available online all the time and sometimes even at a moment’s notice. Given the busy nature of your daily routine, their knowledge about financials has been restricted to saving annual tax and mutual funds investments. Do you think it is a good idea to let your wealth be managed by people you don’t know, and can hardly trust?.
Financial ignorance carries high significant costs both in terms of money and time. Consumers who fail to understand the concept of interest compounding spend more on debts, and higher interest rates on loans. Financial literacy skills are important for people who use payment, savings, credit, and risk management products. People who lack the knowledge to effectively use such services often face financial disaster or crisis. Owning a credit card is an asset, but being ignorant and building up debt makes it a liability.
Why Financial Education is not limited to Managing your Finances.
Let me repeat as it may not make sense to many. “Financial Education is not limited to finding which mutual fund to invest in or where to park your next big money. Or how to have maximum tax saving.” It is about being able to live up to your means at present following a certain set of steps that can navigate your financial systems and help you reach financial success. These steps should be able to support you in your future. It is about understanding how money works and then acquiring the skills to make it work for you in long-term future.
Can a broker be your best friend?
So how does this differs than managing your finances? Well, since we all are now busy with our lives all the time, most common way practiced is investing in mutual funds or tax saving schemes. People then assume themselves to be expert in auto-piloting and forget the rest. They think hiring a broker or following those tips on quora allows them to be blinded towards financial investments as it is brokers work to do. This may sound reasonably okay in theory, but practically it is far different.
- Are you really sure your broker is your best friend?
- Has he pledged you to serve before his family?
- Is your financial success more important to him than his paycheck?
- Does he keep himself updated in his field or is he just selling products that offer back channel commisions to him?
- How pleased will you be if the government puts a 10% more tax on your after retirement income?
Without an understanding of basic financial concepts, people are not well equipped to make decisions related to financial management and often do what is best suggested by their financial advisors aka brokers. I an not saying that following a suggestion is bad, but failing to ask appropriate questions is. Not understanding the actual impact of those decisions is often what costs people more than anything.
If your broker suggests buying a bigger house for tax saving, fire him first thing!
Financial Literacy allows you to understand and grasp different financial principles, concepts like managing debt, compound interest, and most important is how to evaluate time over money. It helps you make better financial choices having positive consequences on your financial well-being. The initial steps to achieving financial literacy include learning the skills to create a budget, tracking your expenses, paying off your debt in smart ways, creating and achieving financial goals and managing internal and external financial challenges. Expert steps could vary from investing your money in different ventures to building multiple passive income streams.
HOW TO IMPROVE YOUR FINANCIAL LITERACY
Here are steps that one can follow to improve their financial literacy. No one needs to be an expert in all the fields, but having an adequate amount of basic knowledge is what help in long run.
- Read as much as possible
- Understand your “Cashflow Quadrant”
- Knowing yourself and exercise the skill
- Acquiring Assets and getting rid of Liabilities
- Finding g powerful expert mentor.
- Utilizing Personal Network To Achieve Goals
- Using Automate Financial Tools
1. Read As Much As Possible
When it comes to improving anything, reading is a continuous task. You can start by reading economic newspapers and then move up to reading economic books, following blogs and podcasts related to money and how it matters. Books like the “Total Money Makeover” and the “Intelligent Investor” can educate you on getting out of debt or picking winning investment strategies. Read “Rich Dad Poor Dad” && “The Rich Man of Babylon” to learn what investing means and why it is needed. You need to know practical tips and techniques to improve your finances that benefit you for the rest of your life. You need to find the right balance between present and future as these are not do-it-in-a-day courses. Financial Literacy is a continuous exercise that needs to be refreshed with new knowledge all the time.
One example is Dave Ramsey, who coined the “7 Baby Steps” for getting out of debt in his book “The Total Money Makeover”. Tony Robbin’s “Unshakable” is a step-by-step playbook that protects your investments while maximizing your wealth. These types of books offer a detailed look at financial remedies when challenges start to mount. Similarly, planning ahead is equally important. Robert Kiyosaki’s “Rich Dad Poor Dad” series shares how generating income through assets, such as real estate and rental properties can help you achieve wealth in the future.
2. Understand your “Cashflow Quadrant”
Cashflow Quadrant is a great concept fantastically explained by Robert Kiyosaki in his book “The Cash Flow Quadrant: Guide to Financial Freedom”. Conceptually, there are four broader ways of making money – employment, self-employment, business and investing. Your core values define what kind of quadrant you belong to, aka from where you make most of your money. Being financially literate, it allows you know (or grasp that fact) that to be rich and successful you need to be on right side of the quadrant (either businessmen or investor) and develop a mindset like them.
3. Know yourself and exercise the skill
You know yourselves better than anyone else. You know what your needs are, how extreme your risk tolerance is and how good are you with welcoming opportunities. Reading is important, but you can’t expect to outperform every opportunity that you encounter and so you need to make sure that along with all the reading, you also do practicality. Penny stocks can provide high returns in small timeframes exploding your networth. You can read all about it and how people made fortunes out of it, but unless you actually try them you will not know what your risk tolerance is or can you even handle the downside. Another example would be earning from a blog.
There is enough on the internet about how to start a blog and start earning, performing SEO or digital marketing, yet unless you exercise and actually try creating a blog, you would never know if it is really within your taste. Regularly exercising your skills allow you to learn from your mistakes, providing you with a vision of scoping a niche or going all in. This results in having a higher possibility of success over time.
4. Acquire Assets and not Liabilities
One of the important things financial literacy teaches you is to differentiate between assets and liabilities. Your goal should be to educate yourself on how to identify true assets and collect them. Assets are resources that provide an income cash inflow with no or little effort. Liabilities are cash outflows that you are obligations to pay to someone Financially educated people focus on collecting assets, while financially illiterate people buy liabilities that they think are assets.
5. Find a powerful expert mentor.
This is a journey that everyone has to go through. The destination will always vary from person to person, yet the principles and rules are always the same. So it is often helpful to learn from other mistakes. Many of the most famous personal finance experts have achieved success only after going through many downfalls. Now they believe in sharing the same knowledge that they gained the hard way with everyone who wants to learn. Learning from their experiences can be helpful for many. These may not be world famous but could be someone found within your local community or network.
6. Utilize Personal Network To Achieve Potential Goals
Ebooks and Podcast often offer what we call a passive learning. While these resources are immensely valuable, one should not ignore the opportunities for gaining expert advice through network connections. You should utilize the knowledge (including lessons learned) from your circle of close influencer like successful friends, family members. They will absolutely help you improve your finances. However, free advice is something that is readily available, so you should be able to differentiate between an experience and an advice and take only that help you.
7. Using Automate Financial Tools
One of the great things you need is budgeting. It comes from tracking your expenses or cash flow using expense tracker or any other automate tracking app( I personally use Walnut, no affiliation). One great way to gain financial literacy is to use specific finance management tool that can help you analyze your statements and actions. These tools help you manage your personal finances in line. Also, automating these things allow you to avoid missing deadlines and disciplined toward your commitments and goals.
No king can grow its kingdom unless he is aware of what his people wish or demand. You do not need to be an expert and being skilled tradesmen provides you with much more control. Following these effective steps, you can improve your money making habits and reach your financial goals faster. After all, you should have control over your money. Only then you can make it work the way you want.
Summary and Conclusion
I would like to hear from you. What are your thoughts on financial literacy? Do you think one should invest into being a financially literate person?
What are major challenge have you seen people struggling with without financial knowledge. What steps have you incorporated into your life to educate yourself and your family?
Or maybe you have a question. Please leave a quick comment right below. Thanks.