Financial Literacy: Know Its Meaning And Significance

Financial Literacy: Know Its Meaning And Significance

Financial literacy refers to the understanding of skills that are related to finance that involves budget planning, investment, borrowing activities, and making savings. With this ability or skill, one can definitely manage their finances better and would be able to make better decisions in the domain. If you are someone who is searching for the best definition of financial literacy then refer to some of them that are mentioned below.

Which Is The Best Definition Of Financial Literacy?

We personally think that there is no best definition of financial literacy and all of the ones that are existing can be considered as the perfect ones in their place. The most prominent definitions are noted below.

The U.S. Government Accounting Office (GAO) defines financial education as:

“The ability to make informed judgments and to take effective actions regarding the current and future use and management of money. It includes the ability to understand financial choices, plan for the future, spend wisely, and manage the challenges associated with life events such as a job loss, saving for retirement, or paying for a child’s education.”

The President’s Advisory Council on Financial Literacy mentioned the following definition for it.

“The ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.”

The Mason and Wilson definition states that:

“It is a ‘meaning-making process’ in which individuals use a combination of skills, resources, and contextual knowledge to process information and make decisions with knowledge of the financial consequences of that decision.”

The Center for Financial Inclusion definition notes that it is:

“The ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.”

We advise you to go through all the aforementioned definitions and filter the best one for you according to your understanding and preference. Do let us know the best definition of financial literacy as per you.

The 5 Principles Of Financial Literacy

Let’s now know the 5 principles of financial literacy to understand the concept better.

1. Have An Understanding Of Your Earnings

Not having track of your earnings is not a good thing. To be financially literate it is important to recognise your income sources and the type of earnings. You also need to ascertain your spending on the basis of what you earn. Moreover, you need to understand how to get a passive source of income so that your savings can be increased. 

This can be done through various sources including investment in bonds or shares and even depositing funds with the bank. However, it is important to research on the matter first before making any investment decision as any wrong move might lead to losses.

2. Budget And Expenditure Planning

You can’t go over the board and spend everything you earn. Also, it is important to have an income that meets your expenditure requirements. This is why you need to have a budget and need to outline your expenditure on a daily basis. 

Planning a budget is the act of keeping aside the funds you earn for specific purposes. When planning a budget, try using the 50–30-20 rule. This rule means that 50% of your earnings should be spent on day-to-day essential items, 30% of it should be kept for additional requirements or luxury, and the rest 20% should be saved for future use.

3. Making Savings and Investments

The money you manage to save after all the necessary expenditures should not be left idle. Instead, the funds should be deployed where they can provide you returns on that saved amount. The best option is to invest it in different financial assets or commodities. You can also choose to go with cryptocurrencies, which have recently gained popularity. However, these are much riskier than any other financial market asset.

In addition, you might want to try one of the safest options, that is, depositing the savings in the bank. Try considering a fixed deposit for higher returns. But yes, while investing in shares or bonds, research and know about the market conditions before putting in your money.

4. Borrowing Activities

Borrowing is just as significant as earning, budgeting, saving, or expenditure. One has to borrow debts from time to time in order to meet expenses or expand their earnings. This can happen in case one wants to invest in certain areas but is unable to due to budget constraints. 

However, borrowing in the correct manner and from the right source is essential. This is because of the fact that all the funds that have been acquired need to be returned in time. Therefore, in absence of proper planning for making borrowings, we think that all financial decisions might be hampered just due to one wrong move.

5. Managing Finance Efficiently

Financial management efficiently is very important as it is a blend of all other points mentioned in the list of principles. This point ensures that one knows the details of the other principles like knowing the earnings, planning budget and expenditure, savings and investments, and borrowing. This principle also aids one in saving their funds from being overspent, which would then turn detrimental for them in the future. In addition, it even helps one to ascertain future sources of income even after they retire so that theft won’t have to be dependent on anyone for their basic needs in old age.

Why Is Financial Literacy Important?

If you are still thinking about why is financial literacy important, then refer to the points mentioned below for reference.

  • It helps one in making better financial decisions.
  • It aids one to save money efficiently.
  • It will enable one to know how to invest in the most optimum manner.
  • It helps one to manage their debts and repayment properly.
  • Future planning becomes easy.
  • One can achieve their financial goal within the set time frame.
  • Decreases one’s stress related to financial activities.
  • Also, aids in curbing unnecessary spending.

What is Financial Literacy for Students?

Financial literacy for students refers to their understanding of budgeting, investing, saving, borrowing, and ways to earn for their daily expenses. This is much narrower than what it is for professionals. This is due to the fact that students can’t do a full-time job to earn their income. All they can rely on is passive income sources or part-time jobs. Therefore, they can consider knowing about various investment options or financial markets for their source of income and savings. This is how they can manage their daily expenditure. So, they can consider saving their pocket money or passive income to invest in options they feel is safe.

Winding It Up!

Financial Literacy is very important in today’s life. This is because of the fact that if one’s finances are not managed properly, their future planning activities might be hampered. In addition, even in the short term, they might have to face a dearth of funds. Further, being financially literate means that one can deter themselves from being cheated on in monetary terms. 

Finance is one of the domains where it is extremely important to be cautious as there are a number of fraudsters to wipe money off you. Moreover, even for students, it is vital for them to know the significance of being financially literate and implementing its principles in the most optimum manner for managing their day-to-day expenses.

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Andrey Ivanov

Andrey Ivanov is a business and finance expert. He has analyzed the finance and business market closely and writes all his articles with utmost precision.

1 Comment

  • Hi! This is my 1st comment here so I just wanted to give a quick shout out and say I
    really enjoy reading through your articles.
    Appreciate it!

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