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Why is financial literacy important

By Nooreen B
Modified on February 26, 2024
why is financial literacy important

Financial literacy is knowing precisely what you are getting into and the pros and cons when making a monetary choice. It is an essential tool everyone should have because it will impact every savings move, money product you take out, or investment venture. Therefore, in a way, financial literacy will also affect every aspect of your life. Keep reading for more information on why financial literacy is crucial and how you can get started on educating yourself. 

Financial Literacy Can Help You Make the Right Decisions and Avoid Bad Ones

There are all kinds of financial decisions you will make, some starting at the young age of 17. Whether choosing a college, taking out credit cards, buying a home, or investing, these decisions require financial literacy.

One example is a choice that most American students will come across when they decide they want to pursue college. Because tuition averages anywhere from $30k to $50k a year for many universities, most young people will need to seek student loans. When you sign up for student loans, you may be taking out hundreds of thousands of dollars. The first thing you will need to figure out is whether you want to go to a private lender or with federal student loans. If you are not informed of the significant advantages of federally funded loans—lower interest rates and flexibility—you may go with the more expensive choice. And although it may not impact you right away, once you graduate, that student loan repayment can hit hard. With private lenders, you could be looking at having to make high payments right away, even if you don’t have an income! 

Another common example that many people face early on is deciding between credit card options and loans. When you are just starting out with your credit score, you may only have access to loans like payday loans, secured credit cards, or credit-builder loans. One option on that list, payday loans, offer convenience. However, if you are unaware of the predatory lending practices that these loans come with, you may choose them for extra cash. This can lead to a cycle of debt, and instead of building new positive credit history, you can harm it. 

And so, as you can see, being financially informed can help you pick the best option for you, short-term and long-term. And it can help you stay away from harmful products and bad monetary choices. 

Financial Literacy and Your Credit Score

The financial decisions you make will directly impact all of your credit scores. You can check all 3 of their credit scores from Equifax, Transunion, and Experian. These scores are determined by your credit history, which consists of all of your financial decisions. Financial illiteracy can significantly affect your financial decisions and making the wrong ones can hurt your credit score. 

Why is having a good credit score important? It will impact the type of lending you have access to and even affect things like employment, renting, and home buying. With a good credit score, you have financial security, and to get there, you will need some financial knowledge—the type that comes with personal financial literacy. 

If you did some research you will find out you can improve or build a credit score with on-time payments and by keeping your credit utilization low. Having a diverse credit mix and limiting the number of credit inquiries on your credit reports will also help. Once you use your financial skills to improve or build your credit, it is essential to check your credit report regularly for any errors. 

Financial Literacy Will Impact Your Relationships

Whether you think about it or not, money and finances will impact your relationships. This is especially true when dealing with a domestic partner or spouse who you share finances with. Studies have consistently shown that one of the most significant predictors of divorce are money issues and fights, which can be avoided with the right knowledge. In addition to a partner or spouse, your financial decisions can impact any dependents you have. And so this is another reason that financial education is so important and one way that it can affect more than just your personal finance. 

When there are people dependent on you, being financially literate is more important than ever because it will directly impact them. For example, let’s say you don’t understand how to use credit cards wisely and end up in a large amount of credit card debt. Your monthly payments for your credit cards could really dig into your income, impacting your partner or children. Another example can be as simple as poor financial habits where you spend money without thinking about the short or long-term consequences. 

It Can Help You Get the Most Out of Your Money

Another reason that being financially literate is important is because it can help you get the most out of your money. Whether it is spending, saving, or investing, knowing your options and how they will impact your personal finances is crucial. 

One common thing that many people have to choose between are savings accounts. A standard savings account doesn’t have much return, but high yield savings accounts can. With the right savings account, you could get more from simply storing your funds. 

Financial Literacy Is Essential When Pursuing Personal Financial Management

Personal financial management is another word for organizing your money. With the right financial education, you can do so successfully. For most people managing their finances usually means creating a budget to get a bigger picture of where their money is going each month or each year. What are some of the benefits of budgeting? Chances are that you will find some ways to save, come up with a better plan for your finances, and set short-term and long-term loans. 

Financial Literacy Is Important Because It Can Significantly Impact Your Future

Another huge thing that financial literacy can help you with is planning for your future. Most people have short-term and long-term financial goals. For example, you may want to finish school, plan a wedding, buy a home, start a family, or retire. All of these goals require financial planning, and if you are financially literate, you can set yourself up for success. For example, if you want to retire by the age of 65, you need to do some serious saving in the right accounts to get to that goal. 

How Can I Learn Financial Literacy?

You don’t have to train to become a financial advisor to understand some basics of financial literacy. There are all kinds of resources available online, books, podcasts, or Ted Talks. Wherever you choose to get your information, ensure that they are a reliable source. Many government websites offer unbiased information to consumers trying to learn about different financial topics. To get some basic understanding of the financial world, educate yourself on the following subjects: 

Budgeting

There are kinds of budgeting methods that you can use and learn about, for example, using the 50/30/20 method or the envelope budgeting method. 

Savings

You’ll find all kinds of information on savings accounts once you start looking! A few financial products that deal with savings include standard savings accounts, high yield savings, and CDs. 

Investing

Investments can include everything from real estate to stock and bonds. Although all investments come with a risk, you can learn which investments are the right ones for you by doing your own research. 

Credit Scores

You should know about the basics of your credit score; what the score ranges mean, and what actions impact it. And just as importantly, how you can check and monitor it. 

Interest Rates

Although interest rates may seem straightforward, there are different kinds of interest you should know about. For example, compound interest vs. simple interest and fixed rates vs. variable rates. 

Loans Options and Credit Cards

To build credit, you may need to use loans or credit cards. Knowing how to compare these options is a huge asset that everyone should have. When comparing loans or credit cards, it is vital to pay attention to interest rates, repayment terms, length of repayment, and the lender you work with. 

The Bottom Line With Financial Literacy 

Everyone should have some basic understanding of their finances. It can help you achieve financial goals, make good decisions, set your relationships up for success, and help with financial stability. You don’t have to be an expert, but understanding some fundamental topics can go a long way!

References: 

Researcher finds correlation between financial arguments, decreased relationship satisfaction| Kansas State University | News and Communications Services
Financial Capability & Literacy | Youth.gov

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