The knowledge and understanding of how to manage your finances is known as financial literacy. It is crucial to be financially literate in today’s world in order to be able to make informed financial decisions and take bold financial steps. Here are some reasons financial literacy is important:
Budgeting
Financial literacy equips you with the knowledge of how to spend your money based on your income. You plan how to spend your money in order of priority. Budgeting helps you avoid unnecessary spending and unnecessary debts.
Saving
Putting some money away for future use is a necessary skill to possess if you want to survive in a financially driven economy. A financially literate person would know that not all their income is to be spent. Some amount, no matter how little, has to be put aside for future consumption. Your savings can be separated into long-term goals and emergency funds. Having emergency funds will ensure that you do not erode into your long-term savings or incur debt in case you are in financial distress.
Investment
Financial literacy gives insight into the sectors of the economy that is viable to invest in. i.e., it helps you make the right investment decisions. It helps you forecast the economy and predict what the future might look like, which can guide you in your investment decisions. Instead of having money sitting idle in your account or in a safe somewhere, you are better off putting that money into a business or other investment options that will yield dividends as time progresses.
Insurance
Accidents are unforeseen. Therefore, it is advisable to put things in place to alleviate your troubles if they occur. Insurance comes in here. Insurance gives you protection against potential financial losses and liabilities. When your life and property are insured, you transfer bearing the risk to the insurer. This knowledge is not inborn. You must be financially literate to know this.
Retirement
Being financially literate helps you plan for retirement. Having a fulfilling retirement depends on how it is planned. You can achieve this by saving and investing. Financial literacy provides you with a safety net in terms of your investment and savings to help you with your living expenses when you are retired. If the plan is to have an early retirement, financial literacy will guide you and provide the necessary skills to make a sound financial decision to be able to achieve this.
Debt Management and Avoidance
These are essential aspects of personal finance that can impact your financial well-being and long-term stability. A financially literate person will know the debts that can be incurred and the ones that should not. Being financially literate will help you strategise your debt repayment plan and method. Understanding interest rates, credit scores, and the implications of different types of debt empower individuals to make informed decisions and take control of their financial situations.
Calculated Risk
Calculated risk means making a decision or taking an action after carefully considering the potential risks and benefits involved. It involves analysing available information, evaluating the likelihood of various outcomes, and making an informed judgement about the potential rewards and potential negative consequences. Financial literacy helps you take calculated risks.
Attaining your financial goals is easier when you are financially literate. Financial literacy also helps you contribute to economic growth as an entrepreneur. There should be financial literacy programmes regularly to educate people on how to take charge of their finances.
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