What Is Financial Literacy?
Financial literacy is a money management skill that is useful in one’s entire life. It involves learning how to balance between cash inflows and cash outflows, making decisions on significant investments and important purchases. For instance, it is wise to pay your debts on time and making sure you do not draw yourself into huge debts. You also have to accept to sacrifice short term needs for long term gains.
How to Manage Your Money
It is advisable to come up with a budget so that you can use your income wisely. The budget should include how much you wish to spend, save and the amount that should go into investment and daily spending. It is crucial to keep track of your spending and your accounts so that you do not live beyond your financial limits.
Financial Literacy Statistics
A significant number of citizens from different countries lack financial knowledge. Financial illiteracy leads to high costs since consumers fail to understand how well to spend their money. A significant percentage spends a significant part of their savings on financial transactions, servicing debts with high-interest rates. Such habits lead to more borrowing and less savings. In most cases, the wealthy are educated and have financial literacy, unlike poor people.
A face to face survey was carried out in 2014 in countries where less than 80 percent of the population had access to a telephone. The survey showed that only 1-in-3 adults worldwide hare financial literacy.
The survey also showed that there were considerable margins in financial literacy based on countries and groups. The poor, women and uneducated persons are greatly affected by financial gaps. People who have bank accounts and credit cards have higher financial literacy compared to those without regardless of income. This means that there is a relationship between financial literacy and financial services such as bank accounts. Therefore, using a bank account or a credit account tends to increase one’s financial skills.
Researchers, institutions and stakeholders can use these findings to offer financial solutions, train people how to open, operate and use credit cards and bank accounts.
Among the countries with a significant number of financial literate people include Australia, Canada, Denmark, Finland, Germany, Israel, Netherlands, Norway, Sweden and the United Kingdom representing 65 percent. Some parts of Asia, Africa, India and China have financial literacy ranging from 24 percent to 42 percent on average. Financial literacy stands at 37 percent in Italy and 68 percent in Canada.
Benefits of Financial Literacy
There are many benefits that one enjoys being financially savvy. The benefits include: knowing why it is important to spread funds in different ventures, thereby diversifying risks. Also, one gets to know the importance of saving money for retirement. It also helps one to make better decisions and take the right actions when faced with a financial problem.
Financial literacy also reduces chances of people becoming victims of fraud. This is true since people tend to believe knowledgeable people who can take advantage of their financial illiteracy. They can also talk to trusted advisors before they can make any commitments. People also invest in most profitable businesses. They are also in a position to spread risk in multiple businesses instead of relying on a single business.
Financial Literacy Among Women and the Poor
There are significant disparities in financial literacy based on gender, income, education level and age. Worldwide, financial literacy in men stands at 35 percent while in women, it is at 30 percent. Gender disparity is in both developed and developing economies. Considering age, country, education and income, women have weaker financial skills compared to men.
Financial Literacy Among Users of Financial Products
For people using savings, credit, payment and risk management products, they need to have vast skills in finance. When people can access financial services, they are in a better position to save and feed for their families. Digital payments can be used to reduce corruption since they are more transparent. Financial services can be used to empower women by giving them more control over their finances.
Good Financial Habits
Saving is as a result of proper financial budgeting. It is crucial to open a savings account so that you do not keep on withdrawing money for emergencies. You also need to have a reserve account to cater for huge purchases and emergencies and do proper budgeting before spending.
To develop an appropriate budgeting plan, you will need to change your spending habits and have control over your money. Practice the following financial habits so that you can save.
- Lower your monthly bills
- Service your debts early before they accumulate huge interests
- Distinguish between short term, medium and long term gains
- Create a list of family needs
Financial literacy helps one to gain basic financial skills. You will need to identify how you are spending your income and establish financial holes that are taking too much of your money. Consider the following steps while making a monthly budget.
- Keep track of your expenses. Anytime you spend money, make sure you keep a record of the amount you spent.
- Identify fixed and variable expenses. Fixed expenses are recurrent bills that you pay every month. Variable expenses are those bills that keep on changing and they can arise at any time.
- Factor in a significant proportion of your income to savings. The rule of thumb is to pay yourself first. Make sure you set a percentage of the revenue into savings. Once you practice this, it will become a habit and it will pay back in dividends.
- Then set your budget. Decide what you can cut from your expenses and determine the amount you want to be saving every week or month. The leftover money can go into the day to day expenses.
Making good use of credits is also an essential aspect of financial literacy. It is critical to manage your credits by using them well and paying them on time. By paying your credits on time, you also improve your credit score. Credit score takes into account your spending and also the repayment period. Ensure that you use the right card and you do a thorough research before you can take any credit.
To conclude, one important aspect of financial literacy is learning how well to use the finances that you have. Besides, you need to save a significant portion of your income while the rest of the income can go into investment. Also, make sure you spend a substantial portion of your income in the most critical needs and those that are urgent.
Robin is our financial expert on private and business loans as well as political issues. He is a former financial journalist.