What is financial literacy and how can we improve it
Financial literacy allows us to make the most of our money and make financial decisions with confidence. In this article, we explore what financial literacy is and three steps we can take to further improve it.
Financial literacy refers to a person’s ability to understand financial concepts, products and risks. Being financially literate can have a huge impact on our financial position: people that display good levels of financial literacy are less likely to fall victim to scams and get into trouble with debt. Moreover, a number of recent studies have observed that low levels of financial literacy and confidence can seriously inhibit our mental wellbeing.
Why is financial literacy important?
Put simply, money plays a huge role in all of our lives. It’s only natural, therefore, to want to get the most out of our hard-earned cash. Ultimately, our interactions with money boil down to financial decisions about how to balance saving and spending as well as our long-term and short-term goals.
Someone who is financially literate is more likely to have the discipline to budget well, avoid bad debt and plan for the long-term while also being able to enjoy the present moment by making good financial decisions. For example, they will know that they should ideally deposit some of their monthly salary into a savings account; however, someone who is perhaps more financially savvy may consider investing their savings in the stock market.
Additionally, the world of finance is continually evolving. 2020 saw the rise of “buy now, pay later” (BNPL) schemes, which enabled online shoppers to pay for online purchases over several months rather than all in one go. For some, BNPL is a useful way to efficiently manage their cashflow but for others it has become a way to all too easily lose track of just how much they have spent. By developing our financial literacy, we can ensure that financial products work for us – and not the other way around.
How can I improve my financial literacy?
1. Consume more financial information
There is a tonne of information out there about personal finance and how we should or should not be spending our money. Ultimately, the decisions that we each make about money depend on our attitude to risk, our goals and, of course, our financial position - we can’t just copy someone else’s approach and expect the same results.
What we can do, however, is try to learn from the best and apply those lessons to our own finances - in this article we shared our top personal finance books. Keeping a book or audiobook about money on the go and committing to reading a little each week can be a great way to learn more about investment, different financial products and developing our own financial goals. Making good financial decisions is in large part due to our confidence with money; educating ourselves on financial matters is the best way to develop this confidence.
2. Study your own personal finances
As mentioned above, we need to apply what we learn through educating ourselves on financial topics to our own, individual financial situation. A good place to start is reviewing your monthly expenditure to understand exactly where your money is going. Once we have an intimate understanding of our own expenditure and ability to save, we can enjoy far greater control and confidence over our financial decisions.
Many banking apps make monitoring your spending easy, showing you the categories that you spend the most money on. If your bank doesn’t offer this, then you could consider creating a money diary and writing down what you’ve spent (or switching banks!).
3. Break the money taboo
In many countries, money can be a bit of a taboo topic. People are naturally uncomfortable with sharing how much they earn, how they spend their money and what goals they are working towards.
But, sometimes, there can be a cost to this modesty. If we can’t openly discuss how much we are spending on rent or how much we earn, then how do we know whether we are getting a good deal from our landlord or employer? By discussing financial topics with trusted friends and family, we can learn from their experience and share in their wins and avoid their mistakes. It can be a great way to develop our financial confidence.