If you want to know why financial literacy is important, this article is definitely going to prove very revealing, informative and helpful.
It explains exactly why financial literacy is important and provides many valid reasons that can help anyone know the importance of having financial literacy.
What Is Financial Literacy and Why Is It Important?
Financial literacy is an experiential knowledge of the importance of money and various issues surrounding its use.
A financially literate individual knows the importance of money, the intricacies of investing money, how money should be managed and expended.
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The purpose and goal of being financially literate are so that the individual and their family will be financially secure as it relates to their present and future lives.
$14.96 trillion is the consumer debt as of September of 2021.
The average debt carried by an American is $92,727.
This indebtedness includes student loans, mortgages, credit card balances, and other indebtedness.
Most likely, if we were in school and these numbers reflected how well we had learned the lesson of personal finance or gauging our literacy, we would probably come away with either a D or an F.
Although it’s not fair to lump everyone into this financial knowledge grade, it appears that the majority of Americans are illiterate when it comes to finances.
As our oldest segment of the American population, the Baby Boomers continue to age, so do the increasing potential medical issues associated with the aging increase.
As part of this generation, many couples are experiencing the devastating effects of the aging process in many ways.
This devastating effect not only impacts the health of these individuals but puts a tremendous strain on their financial resources.
Therefore, speaking from first-hand knowledge, the importance of being financially savvy or literate is a critical component to maintaining the health of an individual both physically and financially.
15 Best Reasons Why Financial Literacy Is Important
1. Helps You Know How to Manage Your Money
Financial literacy is important because it helps individuals to manage their money.
An illiterate individual, as it relates to money, spends and spends their money as if there is no tomorrow, consequently they are bankrupting their future.
Little does an unknowledgeable individual realize that life is a series of ups and downs and at any given moment a situation may arise which can be catastrophic.
These ups and downs of life generally impact one’s finances.
An individual who manages their money well realizes that the money earned today needs to be honored in preparation for their tomorrows.
2. Limits Indebtedness
By being financially literate, an individual can control and manage their indebtedness.
There is good debt and there is bad debt.
Examples of good debt include owning one’s home or purchasing a reliable vehicle to get to and from work, etc.
Bad debt is overextending oneself and living beyond their means.
Generally, bad debt is realized through carried over balances on one’s credit card, overuse of revolving credit, payday loans, etc.
This is bad debt because interest rates paid on unpaid balances can cost individual money that can be otherwise put to better use rather than paying credit card companies.
3. Helps You Teach Others
An important reason to be financially literate is so that any children in the household can learn how to manage their money and put those financial resources to proper use.
In essence, an individual who is financially literate in turn teaches others so that good habits and knowledge are carried forth in their lives and onto further generations.
4. Gets You Ready For Emergencies
Being financially literate prepares an individual for unforeseen circumstances and emergencies that often occur in a person’s life.
Those unforeseen emergencies could include the loss of a job, illness in the family, major home repairs, etc.
If an individual has not managed their money well and set aside an emergency fund or nest egg to deal with these issues, the financial ramifications can be devastating.
Some of those devastating effects could include further indebtedness, possible foreclosure on a home, bankruptcy, etc.
5. Helps You Do Your Part Nationally
As a financially literate individual, that particular citizen is doing their part to control the country’s spending.
This is not meant to imply that one individual’s poor financial management will lead to the economic collapse of a country.
However, if illiteracy extends to a majority of a nation’s population, it can have devastating effects on that countries indebtedness which can spill over into future generations.
When an individual fulfills and does their part as it relates to financial literacy, they become more secure in their financial outlook.
Consequently, if an individual is secure in their financial situation they, in turn, can help other individuals who are in need.
Therefore, a financially literate individual can help others by contributing to worthy causes and providing charitable contributions to help others.
7. Helps You Weather Financial Storms
In recent times, nothing underscored more the importance of being financially literate than the recent pandemic that was experienced.
Many individuals were not able to work and subsequently relied on government stimulus checks to manage their household expenses.
In all probability, these checks were not sufficient to cover mortgages, rents, utilities, food, etc., all of the normal household expenses.
Therefore, it is important to be financially literate to meet any future crisis that may impact our world locally and globally.
8. Helps Improve Your Quality of Life
Be clear, finances are not a reflection of an individual’s worth. Worth is based upon priceless qualities exhibited by an individual.
Some of these qualities include honesty, integrity, love for family, etc.
However, being financially literate most likely provides an individual with financial stability.
Therefore, one’s quality of life has been proportionately increased as well.
With resources for one’s current situation and planning for their future, they are most likely to be less stressed out and confident. With less stress, the individual may be healthier.
This is because stress can create high blood pressure, possibly leading to a negative heart condition and affect the mental health of the individual as well.
Stress can disrupt the individual’s sleeping patterns which may then create additional health issues.
All of these factors dovetail into one to an individual’s quality of life.
9. Gives You Tax Advantages
The reality of being financially literate is not necessarily based on how much money one makes but how much one keeps.
Therefore, a financially literate individual knows the parameters of tax law.
That is not to say that they are an authority, but they know the basics of what can be claimed as deductions and what are the best investment vehicles to engage to limit one’s tax liability.
To be clear, this is not about scamming the tax system or being non-contributing citizens.
It is about following the law and utilizing the law to keep as much money legally as one can as it relates to taxes.
10. Honors Your Hard Work
Attitude goes a long way in every circumstance of our life. We can view things through a prism of negativity or being positive.
It is the old conundrum of whether the glass is half-full or half-empty.
Consequently, an individual who is well-versed in the power of money and how it is earned will realize that the earning of money equates to expenditures.
Those expenditures are your time and energy in exchange for a salary.
Therefore, a financially literate individual knows that in honoring their money they are honoring themselves in what it took to earn that money.
11. Helps You Set Goals
If there are no goals in life then there is the tendency to wander. An aimless life is non-purposeful or having no specific intentions.
A financially literate individual is a goal setter. Through budgeting, planning for retirement, setting aside monies for an emergency, diversifying, etc. are all examples of goal setting.
An individual who is educated as it relates to handling their finances knows where they have been, where they are at and, where they are headed.
12. Gives You Financial Freedom
Most likely there is nothing more energy-draining or mentally stressful to know that an individual is not free to do what he or she wishes to do.
This is especially true as it relates to money.
When an individual is financially illiterate, they often find themselves in debt. This usually means they don’t have a firm grip of their personal finances.
Consequently being in debt to someone is owing to them or they have financial control over you and one’s family.
Therefore, being financially literate can be a powerful deterrent to keep an individual from being in debt and avoiding the uneasy and burdening feeling of owing money.
13. Helps You Plan Your Retirement
Financial literacy is the pathway to a sound retirement.
An individual who knows how to handle money and invest in this powerful commodity for their future is securing their retirement for not only themselves but their family.
Knowing about investment vehicles such as the stock market, index funds, bonds, precious metals, and other alternative investment opportunities helps an individual towards their retirement goals.
It’s also important to remember, through medical innovations and people taking better care of themselves physically, life expectancy is increasing.
Therefore, another added component to the retirement reason of being financially literate is that retirement plans need to outlast our life expectancy.
14. Makes Money Work for You
A savvy financial literate is an individual who knows the power of money.
That power of money is demonstrated when an individual invests their hard-earned money into investment opportunities that provide the best return.
Consequently, it is important to get the best ROI or Return On Investment possible.
Individuals work extremely hard for their money. Therefore a great reason for being financially literate is to ensure that one’s money works hard for them as well.
15. Helps You Care For Loved Ones
What greater reason could there be than to be financially literate and show practically the love that one has for those around them?
By knowing the ins and outs of finances, you’re not only securing your future but securing the future of those that you are committed to caring for.
Why Is Financial Literacy Important FAQs
Are There Any Key Components to Financial Literacy?
Yes, there are definitely several key components to financial literacy.
The three primary aspects of being and becoming financially literate include:
- Having an up-to-date budget
- Having a dedicated savings account that is providing a higher than the average interest rate
- Identification projection
Why Financial Literacy Is Important for Students?
The same reasons included in this article can also apply to students. But even more importantly, the sooner one starts on the journey of financial literacy, the better.
And for students, the sooner they can start learning about money and getting financially literate, the better financial future they will have, especially when it comes to preventing getting into big debt traps.
Also See: How to Save $10,000 in 6 Months.
How Can I Learn to Be More Financially Literate?
One of the best ways to become more financially literate is to be mentored or tutored by an individual who has a proven success or track record of showing financial literacy.
Other possibilities include self-educating oneself through a variety of personal finance books.
Also, several articles and presentations are available through various websites.
What Is the Most Critical Step to Take Towards Financial Literacy?
The first critical and most important step to take on one’s beginning journey towards financial literacy is to assess their attitude.
By this, it is meant that anything can be accomplished and any goal can be achieved if one’s attitude is properly aligned and motivated.
Therefore, the questions are regarding financial literacy is this something that you want, and are you ready to begin?
You Can Do It
It’s never too late to learn.
The classroom is known as the Internet always has its doors open and valuable information and instruction are available through knowledgeable individuals.
It’s not a matter of a lack of resources but a lack of resolve to become more educated as it relates to our finances.
If you have the resolve, you can solve your lack of financial education.
The debt clock of the United States continues to aggressively tick upwards and upwards.
Day after day, most Americans find themselves treading water as it relates to their finances and buckets full of water continues to pour down upon them.
These buckets of water are in the form of credit card offers, consolidated loans, payday loans, and other such opportunities to increase debt.
The most powerful solution to the ignorance of indebtedness is to be literate as it comes to finances.
Perhaps, it’s time to grab the lifeline of financial education and pull with all one’s might.