Just like the knowledge of reading, writing, and basic mathematics is considered mandatory for everyone, being financially literate is equally vital, if not more.
In a report, the Financial Industry Regulatory Authority (FINRA) stated that 66% of Americans are financially illiterate, and the situation gets even worse in developing countries. Being financially literate allows you to effectively manage and make financial decisions in life, ranging from saving, investing in assets or securities.
Read on to find out six core reasons why financial literacy is of paramount importance.
1) Differentiating Between Good and Bad Debt
There’s a negative connotation attached with the word “debt,” as people automatically assume it to be not good. Instead, a manageable amount of good debt can be a good thing.
Bed debt is charged to a credit card spent on consumable items such as outdoor dinners, drinks, or parties. When you accumulate such debt, you end up paying much more due to the interest rate. In contrast, good debt is when you invest in a profitable long-term investment, buy an asset or house, and spend on your further studies.
The investment category alone can include various assets, ranging from short-term to medium to long term. That’s when a formal education like can come in handy. You can go for a course with relevant specifications like online masters in accounting for non-accounting majors. This will help you decide which asset is best for you, not to mention the countless job opportunities it opens up for you.
2) Financial Literacy For College Students
Most students realize the value of money and debt management after accumulating tens of thousands in debt. Though taking out a loan for educational purposes is an investment, this investment can prove to be a liability if it isn’t a careful one.
Being financially literate can help a student decide the best loan option, calculate the total principal and interest to be repaid, return on the investment, and potential consequences. Early financial literacy can help students develop a healthy relationship with money and managing debt can pave the way for them to become financially responsible.
The discipline instilled at an early age will help them make cautious decisions when they have to pay for college tuition, buy a car or a mortgage before they could experience financial misstep.
3) The Time Value Of Money
The time value of money (TVM) is a fundamental concept in finance which teaches you that receiving an identical amount of money now is always better than receiving it later. For example, the decision of whether to receive $1000 today or two years later? Everyone will go for the first option.
However, what if you have the option to receive $5000 now or $5500 a year later? TVM teaches you the simple rule of calculating money with the constant interest rate and decides whether the amount you will receive a year later is higher than the interest rate amount or lower. Hence, it would help to always look for investment opportunities for savings rather than keeping them locked somewhere.
4) Reduce Monthly Expenses
Are you also one of those who feel like their paycheck disappears every month with no idea how it happened? If so, it is time you prepared the list of monthly cash inflows and outflows schedule. This list will give you the idea of where to save money from when you need it for something more substantial.
To prioritize your monthly spending, you can also categorize expenses into two different “wants and needs” categories. Next time, try to cut down on your “wants” section by 50% and use that money to either save it or invest in some cash-generating asset. These minor tweaks and adjustments could save you approximately hundreds of dollars annually.
5) Effective Budgeting
Budgeting is one of the challenges that even experienced people have to struggle with, let alone teens or young adults. It gets monotonous, time-consuming, and even restrictive at times.
However, learning how to budget can help one secure themselves financially. Budgeting makes the process of decision-making simple when you have to decide between alternatives, identify gaps, and make better plans. Besides crucial decision-making skills, one also becomes more disciplined by learning how to budget and focus better on long-term goals.
6) Knowing How To Build Good Credit
A good credit score goes a long way in helping you take out loans and credit cards with favorable interest rates. It also shows how reliable and capable you are in paying back a loan within a stipulated time.
Plus, it comes with many advantages, such as saving significant amounts of money on big-ticket loans like car financing and mortgage, discounts on insurance, better terms and security deposit waivers, and access to the best credit cards in the markets with the lowest rates. Just a slight difference in the interest rate could mean the difference of thousands of dollars over the lifetime of a loan.
Financial literacy is the need of the hour, given the recent uncertain economic situation due to the pandemic and increasingly competitive job market as well as falling saving rates of the American people.
Financially literate people who know personal finance, budgeting, saving, managing debt usually have a more stable future and ride out economic downturns better than those who do not.
It is high time financial literacy should become part of the school curriculum. However, it is never too late for grown-up adults to learn this vital skill too.