More people than ever are becoming interested in strengthening their financial position and improving their financial literacy.
But what is financial literacy? Simply put, it’s having the knowledge you need to make the best financial decisions and reach your financial goals more effectively. Becoming financially literate is all about absorbing enough of the right financial knowledge and applying what you learn to your finances to improve your financial position. Many learning resources are available to help people become more financially literate, including finance books, podcasts, YouTube videos, blog posts and articles that can teach you the information you need to become more financially adept.
But what is financial literacy, and why is it important?
Why is financial literacy important?
Being financially literate is essential to making smart, informed financial decisions.
When answering what is financial literacy and why is it important, it’s worth noting that financial decisions impact every aspect of our lives.These decisions are vital to ensure your financial stability and to allow you to enhance your life by making the most of your money. Financial literacy enables you to make big decisions like taking on debt, such as a mortgage, that generate the best possible financial outcomes. After all, you’ll know to make the best choice for your circumstances. Making an effort to become financially literate can also help you develop essential financial skills, like budgeting, saving, and investing, that help you reach your financial goals and accumulate wealth.
The basics of financial literacy
To be considered ‘financially literate’, there are four key areas on which you should focus your learning efforts. To be truly financially literate, more than just learning about these concepts, it’s essential to put the skills you learn about into practice to allow your life to benefit.
Here are the four key pillars of financial literacy learning.
Budgeting
Budgeting is about planning where your money goes each month.
Generally, to budget effectively, you should create a list of all the expenses/spending categories you spend money on each month and decide how much you want to spend on each category. You should also include a dedicated amount for ‘savings’ and, ideally, ‘investing’ in your budget. Then, you stick to the budget and avoid overspending in any category so that you can save your goal amount each month yet still have enough to cover all your expenses.
By budgeting intentionally, you can limit your spending, boost your savings, and have more capital each month to put into investments.Learning how to set up a budget and stick to it is one of the pillars of good financial literacy, so it’s vital to learn about the budgeting basics. There are also countless budgeting methods to learn about and try, like the 70-20-10money rule or even short-term budgeting challenges like the no-spend month challenge. Trying different budgeting methods can help you find the one that’s sustainable for your lifestyle.
Savings
Building savings and getting into a regular savings habit is essential to cultivating financial literacy.
Understanding how to save and practice discipline each month to contribute to your saving spot is vital. When you practice financially literate habits, you should also have specific savings goals, taking the time to assess your financial situation and decide on what kind of savings you want to build. For example, you might want to save some money for emergencies – and figure out how much to have in your emergency savings fund – and save towards the down payment on a house. From here, you can add a deadline for each savings goal and work out how much you need to save each month to get there. This pillar of financial literacy helps you get closer to your financial goals more quickly –like owning a home – and can protect you from debt if you have an emergency fund (so you don’t have to borrow).
Debt
Sometimes it’s worth taking on debt, and sometimes it isn’t.
Becoming financially literate gives you the knowledge and context to keep out of debt where possible and take debt on when it makes sense. For example, ifyou need a loan to start/develop your business or take out a mortgage to buy a house. Understanding your finances better can help you determine whether you can afford the terms of your loan in the long term and in different future financial circumstances. For example, if the interest rates on your loans increase and/or if inflation impacts your cost of living. Being financially literate also helps you to build your savings – particularly your emergency savings fund – to help you avoid unnecessary high-interest debt, like credit card debt or payday loans.
This expensive debt can quickly damage your financial position and have you paying it off for months or years to come – even if you didn’t borrow much in the first place. Taking the time to learn about finance exposes you to just how much damage debt can do and what you can do to avoid it.
Investing
Of the four pillars of financial literacy, investing is the one with which the fewest people have experience. After all, it’s not something you’re forced to do. This is unlike budgeting, saving, and avoiding debt, which most of us have had to practice to some extent as financially independent adults. Reading up on the tenets of investing, including the dos and don’ts, common mistakes, and popular investing techniques, is essential to becoming a financially literate investor. Many shy away from investing due to the possible risk of losing money. However, provided you make smart, informed choices – and don’t pull your investments out as soon as the market experiences volatility – it’s much more likely that you’ll grow your money in the long term, especially if you practice a consistent investing habit.
Becoming financially literate will teach you how to get started with investing and the platforms and tools to use to do so. More than this, becoming financially literate will enable you to predict how much you’l learn from investing over a given period, whether five, ten or 50 years. You can decide on a goal amount to invest each month based on your long-term financial goals.
Financial literacy for kids
Teaching kids to be financially literate is the number oneway to equip them to become financially responsible adults. But what isfinancial literacy for kids? It’s teaching them to manage money from a young age, safely and risk-free way. By starting young, you can help your child build habits that will last their lifetime and significantly impact their financial position. You can get them enthusiastic about improving their financial literacy with educational money games or encouraging them to use an app to organise the money they earn from the list of age-appropriate chores you set each week.
Get to grips with financial literacy through the HyperJar app
Now we’ve answered what is financial literacy and why it is important, we can give you the tools to help you boost your financial skills. The HyperJar app can help you practice the key financial literacy skills you need to enhance your finances. By creating jars for different spending categories, you can allocate funds to different savings jars – and apply payment controls to limit your spending – ensuring your expenses are taken care of. This can help you to avoid debt caused by spending money where you shouldn’t and not leaving enough for your fixed expenses.
You can also create a jar dedicated to savings and and investing’ jar to encourage you to set aside funds to invest each month.
To learn more about money management, browse the best personal finance books or find out what is financial literacy for kids and howto teach your kids about money, check out the HyperJar blog for more stellar financial advice.
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