Lets start with understanding what financial literacy means.First, It does not refer to formal education in finance. So, you don’t need to acquire a Bsc, Msc or PhD in finance or accounting to develop or increase your financial literacy.
However, it refers to the knowledge necessary for managing personal finances to achieve financial goals. This includes an understanding of how to manage your money well, minimize financial risks, invest prudently and use credit responsibly.
For most people, having a job and earning an income is the key to personal financial well being and independence. Yet being able to earn an income does not equal to being able to make informed and gain long-term benefits of savings and investing and wise judgments about what to do with money once it’s in your hands.
Making thoughtful and informed decisions about your personal finances is more important now than ever. The recent global financial crisis is the result of many complex factors; but close to the source of the problem is the misinformed financially illiterate consumer- you and me.
Most people acquire their financial knowledge arbitrarily, by trial and error. So, you might have grown up not learning any principles of personal finance systematically from your parents.
Instead, you have picked up bits and pieces in school, from the media, and perhaps through your business dealings with financial service providers. Often, the information you acquire is misleading or fraught with errors.
There are several reasons that necessitate the need for you to be concerned about your financial literacy level. But before we get to that, I would like to say something about the brain.
“How is it related to this?" ...Relaaaaax! Just hear me out first.
Am not an expert on the workings of the brain but I learnt something very useful on how the brain works. When you have a problem, the brain processes a solution from the related info stored in it. If there isn’t the required info you end up in a situation where you have problems with no answers. That’s when you seek info from other sources (God, people and books) to help you get the answers.
If you lack knowledge of a certain subject, you will not have answers to problems related to that subject because your brain has no info it requires to work with.
So, to relate this to finances, you cannot make smart financial decisions if your brain is not equipped with the necessary financial info. You have money problems because you can’t come up with answers to those problems. Your brain doesn’t have the required info. But once you get the required financial info… eureka! A solution comes up immediately.
You get me now? ...right! Okay, here are the reasons I wanted to share with you:
I have recently read stories of celebrities suing their financial advisers for lying, stealing and for making bad investment choices. Don’t leave everything to your financial advisor. Actively participate in the decision making. However, we both know now you’ll only do that if you are financially literate.
Many companies have shifted their retirement plans from Defined Benefit (DB) pension plans to Defined Contribution (DC) pension plans.
Do you have any idea what’s the difference between the DB and DC pensions plans? If you do, well. If you don’t, no matter how hard you hit your head, if you never came across them in your life, you’ll never have any idea of what they mean. Hence yo u’ll never know which pension plan is good or bad for you.
Social Security used to be seen as a major source of retirement. But now you cannot depend on it to enable you enjoy life. It serves more like a safety net that will provide enough only for survival.Medical breakthroughs are enabling us to live longer than before. This means we need to accumulate more retirement income to cover living expenses over a longer time. Otherwise, we could become a burden for our families.
Therefore, having a comfortable retirement is not the responsibility of your employer: the company, municipality, the government or state but... on yourself.
Improved financial literacy will be a pathway for you to accumulate assets and achieve your financial security and freedom. This is because financially literate individuals are more likely to engage in sound financial planning.
Here is what you should do:
And as I have said earlier, understand what is being recommended to you. When you are financial literate, you will ask intelligent financial questions. As a result, you get the right answers to better understand the choices being presented to you.
Remember, you can become financially literate at any time. You are not getting any younger, so now may be the best time to get started.