What is financial literacy?
Financial literacy refers to an individual’s knowledge and understanding of essential financial concepts and how effectively they are applied in their money management.Understanding the risks and rewards involved in investments, venturing into new opportunities, and making necessary adjustments that align with your financial goals therefore justifies the importance of financial literacy.
Upcoming market developments in finances, technologies, a vibrant economy, and policy changes necessitate financial literacy to help us make informed money choices.
Financial literacy helps one understand the need for saving and investment so as to benefit from compound interest.
You also know that money put in savings accounts fetches low returns and, with time, tends to lose purchasing power when hit by inflation.
The most recent global financial literacy ranking has 71% as the highest score and 13% as the lowest score, according to S&P Global FinLit Survey.
This wide gap therefore calls for the need for financial literacy among individuals to help them deal with the ever-dynamic financial landscape.
While basic concepts may include inflation, interest rates, taxation, generating income, budgeting, saving and investing, and managing debts, among others, there’s more to that.
In their research paper (Vol. 8, March 2021), Mohamed Sadek ZAIBET and Dr. Cherabi Imed identified financial literacy dimensions as financial (education, attitudes, behavior, and capability).
The correlation between these dimensions and their measurements was determined, and it was discovered to have a positive effect on financial literacy.
In this article, we are going to see how these dimensions can positively influence an individual’s money management skills.
To start us off:
The Bible on Financial Literacy
Galatians 6/6 (New International Version)
“Anyone who receives instruction in the word must share all good things with his instructor.”
The Bible here tells us that those who teach have all good things.
It is good to participate and fellowship with them so as to share the grace.
Likewise, in financial literacy, we should practice the financial knowledge that we learn with regards to financial products and services in the market.
This will enable product and service providers to come up with even more innovative ways of providing financial services.
It will help us meet our needs and achieve our financial goals.
What Are the Advantages of Financial Literacy?
1) You can easily achieve your goals.
Better knowledge and understanding of planning for your money by budgeting, saving, investing, and minimizing the impact of taxes can boost your journey to financial success.
2) It helps in cultivating our saving culture.
When you are financially literate, you tend to know the importance of saving for the future.
With automated debits, you are able to put aside money for emergencies and save for your retirement.
3) You gain confidence.
You approach high-risk investments with confidence and can easily trade in the stocks.
These can increase the chances of higher returns on your investments.
You are also aware you can either gain or lose, and the outcome cannot hinder you from achieving your goal.
4)The knowledge and skills acquired enables you to make decisions that are financially sound.
Even with your smartphone, you can scan through suitable financial service providers and shop for the one with better deals to help you achieve your financial goals.
5) You become financially efficient.
You are able to increase your creditworthiness and borrow a lot at low interest to build your wealth.
6) With technology, you don’t have to waste time and money visiting your bank manager every time and incurring unnecessary costs on transport.
You are capable of doing the transactions on your own at your convenience.
7) You are less likely to fall into fraudulent schemes
8) Your evaluation of available products and services that suit you enables providers to come up with better innovative ways to beat the competition, thus making you benefit even more.
9) You can help shape government financial policies by evaluating and advocating for reforms that benefit your country.
Disadvantages of Financial Literacy
- Too much information can lead to overconfidence. You can easily overestimate your ability to handle money and end up with stalled projects.
- You can easily become obsessed with money and think you are on top of the world.
Ways to Improve Your Financial Literacy
- Set your financial goals and have a good budget that you can stick to.
- Track your spending so as to see where your money goes
- Pay yourself first to avoid getting into your savings.
- Pay bills on time to avoid penalties and additional fees
- Get your credit report and negotiate for a lower interest rate on your credit.
Pay attention to the above steps and use the information not only for aspiration but also for motivation.
Financial Literacy Dimensions And Their Influence On Your Money Management
1.) Financial Education
This is the activity you undertake to improve your knowledge and skills in order to manage your finances
It also enables you to acquire the skills and attitude needed to handle money effectively.
These then translate to responsible money behaviors, which guide spending habits.
Education helps you make well-informed money choices, understand your risk tolerance, and see new opportunities even in your financial setbacks.
Its important to encourage children at an early age to learn about finances so they can gain confidence with money as they grow into adults.
With good financial education, they can make well-informed choices with money in their adult lives.
The basic principles to learn here include:
ii) Spending within your means
iii) Savings and investment
vii) compound interest, etc.
With financial education, you are able to navigate through your financial setbacks and stand again.
You also get to know that your wealth depends on your health.
And that your well-being is equally important.
They say that money is never a problem; the way to use it is.
You also get to know how to minimize your taxes.
Financial education therefore promotes your financial literacy level.
It enhances the ability to handle money with efficiency.
2.) Financial Attitude
Refers to how you’re thinking about finances.
Your early interactions with money and your environment play a major role here.
You are likely to develop a plan by increasing your income, budgeting, and the like when your attitude towards finances is positive.
On the other hand, a negative attitude weakens your bargaining power.
Factors that may affect your financial attitude may include:
- Your previous relationship with money and good experience will leave you yearning to get more information on the good performance. A setback also allows you to learn and make adjustments to suit your course.
- You hear from others and end up being influenced by their words.
- Spending habits.
A good financial attitude will equally translate to a good financial literacy skill.
You can easily choose what works for you in the financial market.
”If a person gets his attitude toward money straight, it will help straighten out almost every other area in his life.” – Billy Graham
3.) Financial Behavior
It is a reaction triggered by both internal and external forces when planning and managing money
Internal forces may be your personal values, likes, and perceptions of what others think of you.
External forces may include technology, society, media, economy, etc.
Usually, the decisions are emotionally biased.
Based on your financial situation, you lose focus on achieving your financial goal when you want to prove yourself to people.
It’s therefore important to make a financial decision that will yield optimal returns rather than pleasing people.
Responsible money behavior helps one use the available resources effectively so as to grow into wealth.
4.) Financial Capability
This refers to the ability to explore the financial education, attitude, behavior, and skills acquired in financial literacy.
When you are financially capable, you can determine your income, budget, manage your debts, etc.
Making decisions that suit your current financial situation also becomes possible.
You are able to participate with confidence in financial service markets.
Also, you become a critical consumer and get value for your money.
You can effectively track your spending using apps on your smartphones.
Your credit score can help you negotiate for lower interest on credit, which can help you build wealth.
Financial literacy is important in our day-to-day money activities.
The advantages of financial literacy clearly outweigh its disadvantages.
The information we gather when planning for our finances can be used as inspiration and motivation to improve our literacy level.
The financial dimensions of financial literacy have a positive influence on our money management.