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The importance and benefits of financial literacy.

The importance and benefits of financial literacy.

Photo courtesy Karolina Grabowska on Pexels.

Financial literacy is the effective use of skills such as budgeting, saving, borrowing, investing, taxation, and personal finance management. The understanding and use of these skills are important in life to make the life journey easier. When a person is financially literate most of the problems relating to finances disappear due to the planning carried out. The person can plan out life goals with ease, use the debt responsibly and retire with no worries. Financial literacy is important and there are many benefits of financial literacy.

It has become much easier to take loans nowadays. Buy now pay later and other credit products have become very common. There are loans available for home appliances, laptops, mobile phones, fashion accessories, travel, furniture, education loan, to name just a few. The problems arise when a person misses a payment and there are interests and penalties. It has become all the more imperative for a person to use the loans wisely. They should be able to clear all the debts on time otherwise they would have unsustainable debt due to poor spending decisions.

Financial literacy requires the knowledge of skills such as budgeting, management of debt, and understanding of various credit and investment products. A financially literate person would be less prone to the financial frauds that are common in the financial world and understand the time value of money and power of compounding.

There are many strategies and skills a person should learn for effective money management-

  • Budgeting-

Be aware of the amount of money that you are getting after the social security deductions. Create the budget with your net income. There are two types of expenses; the fixed ones and the variable ones. Fixed are the ones that are mandatory like utilities, house taxes, groceries while the variables are the ones like vacations, restaurants, movies entertainment. A person can cut on the variable expenses. Once you have listed both the fixed and variable expenses you have an idea of what your expenditure would look like in the coming months. When you have documented your income and spending you would be aware of how much money would be available to pursue your goals. There are various budgeting methods like the zero-based or the 50/30/20 plan and chose the one you would find easy to implement.

  • Borrowing and timely payment of bills-

A person has to borrow money to fulfill some of his needs, as there may be no other alternative. Like you have to buy a house and the amount is huge, you are compelled to take a loan from a bank or a housing finance company. There should be a basic understanding of the interest rates and the time value of money. All the bill payments should be done on time and if there is a credit card bill a person can download the cred app which is a digital payment app that simplifies the bill payment process.

Review your credit reports and inform the credit bureau if there is any inconsistency because if this is carried forward it would jeopardize your future loan-taking capability. Maintain a good credit score by timely clearing all the loans which would be helpful in getting the best rates on interest loans whenever needed.

  • Investing-

Investment is done with the aim of generating income or capital appreciation. It is done for the purpose of wealth creation and involves the use of time, effort, and money. Investment can be in debt instruments like bonds and CDs or it can be in stocks or real estate. A person should be aware of the interest rates, diversification, and risk mitigation.

Saving is keeping money for future use and there is no risk involved. But in investment, there is risk involved as the asset where you park your money may lose value or may not generate any return. In stocks, there is a high possibility that you may lose your investment as the company where you invest closes down. Investing is different from speculating as an investment is holding the asset for the long term while speculating is done with the aim to derive profit in the short term and is a highly risky activity.


Many people land into tax problems due to their ignorance. They don’t know what they are doing. A person should know which records to keep and which are not so vital. How taxes impact a person’s income is important for financial literacy. Whether a person is employed or doing a business, he should be aware of taxes on investments, inheritance, or even rental income. There are a number of instruments where a person can invest to save taxes.

Financial literacy is important and the benefits of financial literacy in a person’s life are-

  • Finances affect the life of a person. Financial literacy allows a person to take charge of his life. Without financial literacy people make bad decisions and create a financial mess from where they find it difficult to escape.
  • There is less debt accumulated as the person is aware of its consequences on cash flow and credit report.
  • Expenses can be reduced through continuous monitoring of budget.
  • Even when a small amount is saved over a period of time it can compound to a very big amount.
  • A person is well aware of the interest rates of home loans, car loans and credit card repayment on his balance sheet.
  • An effective budget can be prepared.
  • A person can prepare for his future life goals and be prepared to retire in a planned manner.
  • Less of stress and anxiety as money problems would be resolved.
  • With a better handling of the finances a person gets respect from his friends and family who want to benefit from his knowledge.

Since personal finance is not taught in the classrooms reading some good books can increase financial literacy. There are many books available on personal finances, budgeting, insurance, investment, retirement planning, estate planning, and the stock markets. Some of the books are-

  • Rich Dad Poor Dad by Robert Kiyosaki.
  • The Automatic Millionaire by David Bach.
  • The Intelligent Investor by Benjamin Graham.
  • The Richest Man in Babylon by George S. Clason.
  • The Millionaire Next Door by Thomas J. Stanley and William D.Danko.
  • Broke Millennial by Erin Lowry.
  • I Will Teach You To Be Rich by Ramit Sethi.
  • Think and Grow Rich by Napolean Hill.
  • How I Invest My Money by Joshua Brown and Brian Portnoy.
  • How To Own The World by Andrew Craig.
  • Be Your Own Financial Advisor by Jonquil Lowe.
  • From the Rat Race to Financial Freedom by Manoj Arora.

Financial literacy for kids-

Kids learn most of the lessons from their parents as in the initial years of their life parents are everything for them. But very few parents teach their kids about financial literacy and try to keep them away from financial discussions and money matters of the household. The schools and colleges too don’t teach them much about financial literacy. So when a kid becomes an adult he has not learned much on how to handle money matters and often learns by making mistakes that could have been avoided by initial lessons during his childhood.

Teach the children about wants and needs. A need is necessary for life like food, water, and shelter whereas the wants are not always necessary but desired to increase the quality of living. Give the kids pocket money and monitor how they spend it. If the child is very young teach them to save money in a piggy bank or the banks which open savings account for the kids. The account for kids below 10 years of age can be operated jointly with the parent or the guardian. For the children between 10 to 18 years of age, the account can be operated by the children on their own.

Slowly but gradually teach the child the topics of financial literacy. Teach them from practical experiences of life by giving examples on saving and investing. Tell them about frugal living and the importance of saving. Make them understand the interest charged by credit cards on late payment and the dangers of overleveraging money. Ask them to note down and track their expenditure on a weekly basis and tell them how they would reach their goals faster if they are spending prudently.

If you are involved in the stock markets teach the kids about the bull and bear markets when they are a little mature and if you don’t invest in share markets then at least advise them to invest in stock markets through mutual funds.

There can be no two thoughts that financial literacy is very important for life. It leads towards a solution for most of the financial problems that a common person faces. There is less stress in life and a person can look towards a planned retired life. Money can’t buy you happiness but it can definitely make your life easier and for that financial planning is a must.

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