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Financial Wellness

Financial Literacy and Getting Back on Track After Lockdown

Money is important. It might not buy you happiness, but it can buy you a house in a secure neighborhood or help you survive in the middle of a pandemic. To use your hard-earned money wisely, you must have a good understanding of how money works. In other words, your grasp on financial literacy determines how efficiently you use your money and how helpful it will prove to you. Despite its importance, many are still unaware of financial literacy, but you won’t be one of them by the end of this article.

What is Financial Literacy?

Financial literacy refers to knowledge related to money and its usage. From basic tips about budgeting to estate planning, investment management, and general money management, it covers everything. A lack of financial skills is the consequence of financial illiteracy, which often leads to dead ends and frequent financial setbacks.

Skilled female student learning financial literacy from analytic documents.
You Don’t Have To Become An Expert; Knowing Some Core Skills Should Be Enough (Image Source: Shutterstock)

Learning how to make more money by working less, understanding how to save it, and how to use it are all parts of financial literacy. You don’t have to become an expert; knowing some core skills should be enough. The five main components of financial literacy are:

  • Budgeting. Effective spending of money, paying off debts, and saving for the future.
  • Taxation. Income tax rates, inheritance, employment taxes, etc.
  • Personal Finance Management. A combination of all other components, including planning.
  • Investing. Risk management, asset allocation, profitable investing, rates, and procedures.
  • Borrowing. Information related to loans, debts, interest rates, and time value.

Now, to be financially literate, you have to accept that you’re illiterate at the moment, which might sound like a bitter pill to swallow. But it’s worth it. No matter how wealthy a person is, at one point or another, they will face problems that can only be solved by someone who’s financially literate. 

For some, the term itself implies a type of paternalism practiced by experts. You can see an example of that in the investment industry, where companies use related jargon that most people cannot understand to entrap investors. Financial “gurus” also use financial literacy as a banner to attract financially-challenged people looking for answers. They give them a long motivational lecture and a few budgeting tips, and then send everyone home with a false sense of security.

Despite the negativity attached to the term, financial literacy is effective. But it is important to note here that it is not going to lead you to perfection. You will still make mistakes, but this time, you will understand what those mistakes are, how they occur, and what you can do about them.

The Importance of Financial Literacy and Investment Management

Apart from helping you hone critical skills, financial literacy prepares you for new trends. Technological advancements and the increasing use of the internet to conduct online transactions make the field of finance open to change.

Make money from internet shopping online by computer laptop.
Financial Literacy Helps You Understand How To Avoid Debt And Scammers (Image Source: Shutterstock)

In the United States, lack of financial literacy among millennials has led them to financial turmoil. Millennials make up the majority of America’s workforce and have been badly affected by the pandemic. According to research by the New York Federal Reserve, millennials owe $1 trillion in debt. More and more people have now realized how important it is to know how to make money from home and to have a backup plan.

On the surface, the problem of financial illiteracy seems like a personal one that only affects the individual. But history says otherwise. These individuals are the ones who make up society, so their literacy has a direct impact on the state’s economy. In 2008, there was a severe financial crisis in the US that arose from a widespread lack of understanding about mortgages. According to research, better financial literacy can enable consumers to avoid indulging in costly and high-risk financial products. Hence, more financial literacy can lead to a more robust economic structure.

Besides influencing the economy, financial literacy helps you understand how to avoid debt and scammers, how to manage your investments, where to invest, when and why, fund your children’s education, decide which pension saving program to apply to, and so much more. In short, financial literacy protects you from pitfalls and stress that can be easily avoided.

Once you learn a few tips on how to save money, you’ll be free of the financial anxiety that haunts millions of Americans. The pandemic has served as a good reminder of this. If you live paycheck to paycheck, this is your sign to change your routine and learn a few money-saving tips.

The Best Financial Literacy Books

Now that you know what financial literacy is and why it’s important, you might be wondering where to begin your journey. Below are some of the best books on financial literacy, written by experts who have had hands-on experience with financial problems:

Young woman at home sitting on modern chair in front of window relaxing in her living room reading book and drinking coffee or tea.
Read Books Written By Experts Who Have Had Hands-On Experience With Financial Problems (Image Source: Shutterstock)

The Millionaire Next Door by Thomas J.Stanley. The author explains the characteristics of a millionaire, and they’re not exactly what you would expect. Through this, Thomas J. Stanley explains the importance of saving up, paying off debts on time, and having more than one source of income. He talks about asset allocation and staying on the lookout for target market opportunities.

The Automatic Millionaire by David Bach. One of the most popular bestsellers in the US, this book describes the importance of saving. It’s short and to the point. It will teach you how to automate your savings and save time on budgeting.

The Total Money Makeover by Dave Ramsey. If you’re deep in debt, this book’s for you. Dave Ramsey explains in clear and simple words how to get out of debt, manage your budget effectively by applying his budgeting tips, and avoid widespread pitfalls such as using credit and cash advances.

The Intelligent Investor by Benjamin Graham. If you’re interested in investing but don’t know where to start, you need to read this book. It’s a detailed guide about investment management that explains market fluctuations, inflation, speculation, and risk reduction. You will also learn what kind of investor you should become, depending on various factors.

Rich Dad, Poor Dad by Robert Kiyosaki. Chances are, you’ve already heard this title before. It’s perfect for beginners as it contains thoughtful insights about markets and their relevant laws, investment, accounting, and the difference between assets and liabilities. 

Conclusion

Financial literacy is an understanding of financial terms, strategies, and skills, which helps you make wise and informed decisions to maximize your wealth. It equips you with a mindset necessary for coping with challenges and teaches you how to avoid bankruptcy and other financial setbacks. Lack of financial literacy affects not just individuals but the country’s entire economy. Knowing how to make money is not enough. You should know how to use it wisely. So it’s time for you to pick up a book and start learning.

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