Financial Literacy



"Definition and Importance"

What is Financial Literacy and Economic Literacy?

By definition, financial literacy means understanding how to earn, spend, save, manage, and invest money. It also means understanding how the economy works. Financial literacy is the knowledge and understanding of financial concepts and risks, as well as the skills, motivation, and confidence to use this knowledge and understanding to make good decisions in a variety of financial situations, improve the financial well-being of individuals and society, and take part in economic life. However, financial and economic literacy is more than just knowing about money and the economy. Attitudes, motivation, beliefs, etc. are also considered parts of financial and economic literacy that affect how people act financially and economically.

On the other hand, economic citizenship is the result of an ecosystem that provides social, financial, and livelihood education, along with financial inclusion, to give people a stronger sense of empowerment and socio-financial capability (Child and Youth Finance International).

Financial literacy refers to:

  • The ability to understand how money works and why it is important.

  • How does someone manage to earn or make money and how that is managed or how a person invests it to turn it into more.

  • It also refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.

The Five Core Components of Financial Literacy

  1. Earning - refers to the amount of money brought home through a job, self-employment, or various investments.

  2. Saving and Investing - deals with the understanding of financial institutions and services. To begin with, an individual should have a savings and checking account in order to manage their own financial operations.

  3. Spending - is likely the most significant idea because it reflects your personal values, lifestyle, and financial behavior. Distinguishing between NEEDS and WANTS is the fundamental principle of expenditure control. Budgeting is the most effective and powerful strategy for controlling spending in order to save and invest.

  4. Borrowing - it creates assets through debt. For example, students need student loans to finance their education; with a repayment plan, they can profit from this investment. Mortgages are another method of borrowing to produce assets. Borrowed money can be turned into assets and profit through company loans and real estate investments.

  5. Protecting - includes insurance, ID theft, and retirement. Personal, health, and societal protection is the goal. To protect yourself and your family financially, you must understand risk management, insurance, identity theft, fraud, and scams.

Importance of Financial Literacy

Financial literacy is crucial not just because it provides a foundation for making informed financial decisions, but also because financial responsibility is growing. Employers, for example, used to manage their employees' retirement savings. Individuals now bear a greater share of this burden through self-directed retirement accounts. Furthermore, the range of financial goods has expanded, and credit is more freely available, giving consumers additional options.

Any advancement in financial literacy will have a significant impact on people's ability to provide for their future. Recent trends make it even more important for consumers to understand fundamental finances because they are now expected to shoulder a greater portion of the weight of investment decisions in their retirement accounts, all while deciphering more complex financial products and possibilities. Financial literacy is not easy to achieve, but once achieved, it can significantly reduce life's difficulties.



References:

Building and Enhancing New Literacies Across the Curriculum Module

Economic education/Financial literacy. (n.d.). Department of Education. https://www.education.pa.gov/Teachers%20-%20Administrators/Curriculum/EconomicFinancialLiteracy/Pages/default.aspx

Financial and economic literacy—Implications for education. (n.d.). MDPI - Publisher of Open Access Journals. https://www.mdpi.com/journal/jrfm/special_issues/financial_economic_literacy

What is financial literacy and why should you care? (2019). Federal Reserve Bank of St. Louis | Economic Resources & Data. https://www.stlouisfed.org/open-vault/2019/april/what-is-financial-literacy-why-care

Why financial literacy is so important. (2015,). Investopedia. https://www.investopedia.com/articles/investing/100615/why-financial-literacy-and-education-so-important.asp#toc-why-is-financial-literacy-important

Photos from:

https://www.nmrestaurants.org/financial-literacy-for-restaurants/

http://www.columbiasharenet.org/5-components-of-financial-literacy.html

https://www.teachhub.com/professional-development/2021/04/the-importance-of-teaching-financial-literacy/