According to Wikipedia, financial literacy is the possession of the set of skills and knowledge that allow an individual to make informed and effective decisions with all of their financial resources.
Most of us believe that having more money or getting a bigger pay at work will reduce our financial stress and solve half of our problems. However, we fail to realize that one’s financial wellbeing is considerably more determined by how they manage and spend their money rather than how much money they make. Your beliefs about money and your spending patterns greatly influence your potential to create wealth.
Financial literacy covers topics such as budgeting, expense tracking, investing, debt, taxes, emergency funds, retirement savings and estate planning.
WHY IS FINANCIAL LITERACY NECESSARY?
Financial literacy is necessary because it equips people with the knowledge and skills needed to manage money effectively. What do I mean? Financial literacy ensures that every financial decision you make is backed by a rationale that empowers you to be confident and secure in your choice.
Statistics from a study in 2019 by the Financial Industry Regulatory Authority (FINRA) in America showed that lack of financial literacy cost Americans a total of $295 billion in 2018. Some of the households which participated in the study reported annual losses of up to $2500 due to poor financial decisions. Furthermore, it was stated that 63% of Americans could be categorized as “financially illiterate.” This buttresses the fact that financial literates make better money decisions than those who are not. Imagine how much you will be able to do if you can track your expenses, seal the loopholes in your purse and save more money?
Also, we must intentionally seek financial literacy because it is a subject that is rarely taught in our conventional education system even when much of what happens outside the four walls of school revolves around money management. Without financial literacy, even a well-educated and gainfully employed graduate can slide into bad debt and poverty.
FINANCIAL INTELLIGENCE AS A PRODUCT OF FINANCIAL LITERACY
In my words, financial intelligence (FINTEL) is the basic knowledge of how money works and the application of this knowledge in making financial decisions that make life better. It is the knowledge and skills gained from understanding finance and accounting principles in the business world. This understanding, financial intelligence, can only be gained through financial literacy.
There are three types of education: academic, professional and financial education. The primary school system places much emphasis on basic literacy skills such as reading, writing, speaking and solving arithmetic. Students are graded based on their ability to develop these skills and apply them in solving real-life problems. Very little or nothing is taught about financial education and money management in higher institutions. Hence, you must be deliberate about educating yourself on money. As you strive to build your intelligence quotient, also work on your financial intelligence.
Interestingly, the skills gained in FINTEL are NOT innate; rather, they are learned and can be developed at all levels. So, you don’t have to worry about having a low grade in this. You can improve no matter the level you are. Contrary to popular beliefs, financial intelligence is NOT the state of having a lot of money. It is neither a goal nor a course that you are graded for. Rather, it is the means to the goal of financial freedom!
QUESTIONS TO HELP YOU GAUGE YOUR FINANCIAL LITERACY
It is easy to assume that you are financially literate because you “know yourself.” However, your personal finances need extra attention if you want to live well. The only way to get a better handle on your personal finances is by identifying what you don’t know and putting in the effort to get educated.
Here are a few questions identified by Bayportsa to help you identify your financial literacy gaps:
- Budget: Do you have a monthly budget that includes all of your basic expenses, debts and savings?
- Expenditures: Are you tracking your expenses and do you know about how much money you spend to cover living expenses over a period of three to six months?
- Debt: Are you in debt? Are you taking active steps to reduce your debts?
- Emergency Funds: Do you have emergency funds that can help you to get through an event like losing your job or crashing your car without having to borrow money?
- Savings: Do you pay yourself first? What percentage of your income goes into savings? How do you manage your savings?
- Investing: Are you investing and growing your money? Do you understand how compound interest grows invested money?
- Insurance: Do you understand the importance of insurance? Do you have insurance to protect you in the event of a major life emergency?
If you answer “No” to two or more questions, you have some learning to do.
HOW TO INCREASE YOUR FINANCIAL LITERACY
- Read self-help books on financial education. Follow authors like Robert Kiyosaki, Dave Ramsey, T. Harv Eker, Brian Tracy, etc.
- Read blog posts and articles on personal finance in newspapers and magazines. Some popular blogs include investopedia.com, entrepreneur.com, forbes.com, Business Insider, Bloomberg and fintelcoach.com. For a steady supply of information, you may subscribe to their email newsletters.
- Watch YouTube videos on money management.
- Attend financial literacy seminars online and/or offline and take notes.
- Take an online course on any aspect of financial literacy that you want to master.
- Listen to podcasts and radio programmes on financial management.
- Get a competent financial intelligence coach or personal finance expert to give you financial advice.
- Join a community of people who learn about financial intelligence. This allows you to ask questions and learn faster from other people.
- Practice and share your knowledge. Put your newfound literacy into practice. Draw up and stick to a budget. Save. Invest. Don’t just learn and keep the knowledge you acquire to yourself. Teach others whenever you have the chance. This is the best way to consolidate your knowledge.
BENEFITS OF FINANCIAL LITERACY
In an article by Georgiasown.org, it was stated that financial literacy is important because it helps people become self-sufficient and achieve financial stability. Financial literacy enables people to save money, distinguish between wants and needs, manage a budget, pay bills, buy homes, pay for college and plan for retirement. In a nutshell, it helps you create a realistic roadmap for making financial decisions all through your life.
Financial literacy empowers people. Although I am not trying to imply that you need to become a financial guru or accounting expert, however, knowing how interest rates work, the difference between stocks and bonds and the factors that impact your financial wellbeing will give you a sense of financial security and control over your life.
Need I say that financial literacy decreases your stress level? When you lack financial education, anything that resembles credit, interest rates or investments seems intimidating and leaves you feeling at a disadvantage. When people are well versed in the state of their finances, they have the information needed to take action, modify their investment portfolio or continue with their current strategy.
Furthermore, understanding your finances helps reduce the risk of becoming a victim of fraud. Some tactics are easy to believe especially when they come from someone who seems to be knowledgeable and well-intended. A basic level of financial education will help you recognize red flags and, at the very least, talk with a trusted advisor before making financial commitments.
In conclusion, financial literacy is an essential life skill that every person, whether employee or entrepreneur, should deliberately learn and hone. If you stay committed to personal development and investment in financial intelligence, you are on the pathway to achieving financial freedom.
If you would like to take an in-depth course on financial literacy and how to manage your personal finance, I recommend that you enrol for LEAD Resources’ Digital Economy Emerging Managers’ (DEEM) programme as more practical measures of attaining financial freedom in the digital economy have been distilled therein.
ABOUT THE AUTHOR
Obot Essiet Jr. is an Associate Solutions Architect at LEAD Resources, a Financial Intelligence (FINTEL) Coach and a Co-founder/COO of Naiyuan Mart, a Chinese-Nigerian procurement and manufacturing company. He runs a blog and a community on financial intelligence. He is passionate about helping people journey towards financial freedom through practical financial literacy solutions. Obot Jr. loves writing, gardening, watching adventurous movies, cycling and playing chess.