Insight #1: Financial Literacy

Insight #1: Financial Literacy

How we define Financial Literacy? A commonly agreed definition of financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, spending, and investing, and furthermore to make informed and effective decisions with all of their financial resources. When we are financially literate, we do have the foundation of a relationship with money, and it is a lifetime learning journey. The earlier we start, the better off we surely will be. In short, financial literacy is the possession of skills that allows people to make smart decisions with their money.

Given the importance of finance in modern society, lacking financial literacy can be very adversely impact an individual’s long-term financial success. Even so, research shows that financial illiteracy is very common, with estimated as high as 75% still considered as “financially illiterate”.

Being financially illiterate can lead to several pitfalls, such as being more likely to end up in debt burdens, either through poor spending decisions or a lack of long-term preparation. This, in turn, can lead to poor credit, bankruptcy, housing foreclosure, and other severe consequences.

Honest contemplation on the following checking questions will provide us with our real financial literacy level:

·????????Awareness on how much money we spend to cover living expenses over a certain period of time.

·????????Ability to create a monthly budget that includes all of our basic expenses, your bills, any debts, and sinking funds for future purchases.

·????????Understanding on the impact on debt and how to manage our debts.

·????????Understanding of how compound interest allows invested money to grow over time.

·????????Knowledge on various kinds of insurance needed to protect oour finances and investments.

·????????Understanding on the difference between an investment and insurance and how to align with our current situation and future goals.

·????????Anticipation of unfavorable situations such as layoff or a death.

There are five broad principles of financial literacy. Although other models may list different key components, the overall goal of financial literacy is to educate individuals on how to earn, spend, save, borrow, and protect their money. From day-to-day expenses to long-term budget forecasting, financial literacy is pivotal in managing these factors. It is important to plan and save enough to provide adequate income in retirement while avoiding high levels of debt that might result in bankruptcy, defaults, and foreclosures.

In general, the benefit of financial literacy is to empower individuals to make smarter decisions. More specifically, financial literacy is important for a number of reasons:

1.?????Financial literacy can help individuals reaching their goals. By better understanding how to budget and save money, individuals can create plans that set expectations, hold them accountable to their finances, and achieve their goals and dreams. Although someone may not be able to afford a dream today, they can always develop a plan to better increase their odds of making it happen.

2.?????Financial literacy can prevent bad mistakes. Seemingly innocent financial decisions may have long-term implications that cost individuals money or impact life plans. Financial literacy helps individuals avoid making mistakes with their personal finances.

3.?????Financial literacy prepares people for emergencies. While losing a job or having a major unexpected expense are always financially impactful, we can cushion the blow by implementing their financial literacy in advance by being ready for emergencies.

4.?????Financial literacy enhances confidence. It could lead to a disaster to make a life-changing decision without all the information you need to make the best decision. By being armed with the appropriate knowledge about finances, individuals can approach major life choices with greater confidence realizing that they are less likely to be surprised or negatively impacted by unforeseen outcomes.

The following are several simple action steps we can take in order to utilize our financial literacy into life:

1.?????Keep building wealth in a smart yet proper way.

2.?????Do not forget to give generously.

3.?????Start and maintain an emergency fund.

4.?????If we’re still in debt, get out of it.

5.?????Invest 10-20% of our income in retirement.

6.?????Save for further education level.

7.?????Pay off our mortgage as early as possible.

Follow up Thoughts: Not only do firms tout corporate social responsibility when articulating their corporate strategy to their stakeholders, financial market participants place ever-growing importance on environmental social and governance (ESG) considerations. Several researchers have raised a simple yet fundamental question: do green households make green financial decisions. Moreover, there are typical questions asked to respondents, such as: “Are you willing to pay more for environmentally friendly products?” and “How much you recycle in a certain period of time?” Answer to these questions will clearly shows are stance toward green financial decisions.

Another important suggestion: We need to teach our children to gradually understand the importance of financial literacy. Some of them are: give them the responsibility of a bank account; get them on a simple budget; Help them figure out how to make money; encourage to avoid impulse buys.