Finschool By 5paisa


What is Financial literacy? Why is it Important?

By News Canvass | Feb 08, 2022

Financial literacy refers to the capacity to understand and apply financial concepts such as Budgeting, investing, credit management, and financial management etc. Financial literacy, in other terms, is the capacity to handle money. These abilities will help one achieve a variety of life objectives, including retirement, education, and even taking a trip.

Budgeting, controlling spending, paying off debt, and understanding the risk-reward trade-off in investment products are necessary for financial literacy. Understanding basic financial concepts such as time value of money, compound interest, annual return, and opportunity cost is also part of Financial Literacy.

Individuals  lacking financial literacy find it difficult to make big financial decisions. Furthermore,Financial literacy improves financial discipline and capacity. This will result in significant lifestyle changes, such as regular saving and investing, good debt management, and the achievement of life objectives. Furthermore, financial literacy will protect individuals from financial fraud and preserve their financial well-being.

Financial illiteracy results from the lack of knowledge of these abilities. Budget misalignment, more costs than income, debt buildup, low credit score, being a victim of financial fraud, and other unpleasant repercussions can be the outcomes of being a financially illiterate person.

Advantages of being Financially Literate
  • Ability to make more informed financial decisions
  • Effective management of money and debt
  • Having a better understanding of how to achieve financial goals
  • Expense reduction through improved control
  • Financial anxiety and stress are reduced.
  • Increase in ethical decision-making when selecting insurance, loans, investments, and using a credit card
  • Effective creation of a structured budget
Components of Financial Literacy

Financial literacy is composed of a number of financial components and skills that enable a person to learn how to handle money and debt effectively.

I) Budgeting:-

Budgeting is a necessary life skill that aids in the acquisition of financial knowledge for money planning and management. It’s one of the most crucial aspects of financial knowledge. Keeping track of one’s spending patterns is crucial. The creation of an executable financial strategy will be aided by effective money management. The practical plan will assist in keeping track of costs, separating the unneeded ones, and ensuring that money is spent properly.It is important for financial security and independence.

II) Debt:-

Debt is often viewed as a negative element. As a result, it’s critical to understand debt. It’s also essential to understand the difference between good and bad debt. Borrowing money for goods that are required to make a livelihood is considered good debt. Borrowing money for unneeded expenses is considered bad debt. As a result, being able to distinguish between required and superfluous spending will assist an individual in avoiding falling in debt.

III) Savings:-

Savings guarantees financial security, a stable present, and a bright future. Long-term wealth may be built via prudent financial planning. Keeping track of one’s spending patterns might aid in money saving and financial discipline.

IV) Investments:-

Instead of letting money sit in a bank account, it can be invested in financial products. Investing is all about creating and developing wealth so that you may live a secure and happy life. Investments will assist in the generation of additional monthly income as well as substantial profits. It is also possible to attain financial goals while allocating funds to retirement savings. Equities, debt instruments, mutual funds, real estate, and gold are some of the most popular investment possibilities.

Why is Financial Literacy important?

1) Financial literacy is important as it provides individuals with the information and skills necessary to efficiently manage their finances.

2) Without financial literacy, one’s actions and judgments regarding savings and investments would be based on a shaky basis.

3) Aids in the better comprehension of financial concepts and the effective management of one’s money.

4) Assists in proper money management, financial decision-making, and financial stability.

5) imparts in-depth understanding of financial education and many techniques required for financial growth and success.

5) provides in-depth understanding of financial education and many techniques required for financial growth and success.

6)Adopting the greatest debt solutions allows one to become debt-free.

Financial literacy is an important life skill to acquire since it improves one’s financial potential. Financial planning, budgeting, and saving should be taught right from school. Recent developments have made it even more critical for consumers to comprehend basic financial concepts. 

View All