Why Financial Literacy is Important

Financial literacy is the ability to understand finances and how they work in order to make sound financial decisions. Not only is financial literacy important for adults, but it should be taught to children as well. Bankruptcy is a big problem in the modern world, and one of the leading causes of divorce is money issues. Even a look at national debt will indicate that our society does not know how to handle money, which makes teaching financial literacy even more vital.

One of the primary reasons that it is necessary for everyone to be financially literate is that more and more consumers are being forced to take increased responsibility for their finances. There is no more relying on an investor to handle the details, every consumer must understand finance and how to make the most of their money. This is a lesson that was amply taught when the mortgage market crashed in 2008. So many thousands of consumers had a mortgage, but were clueless about the details of how it all worked. No one can expect to be able to be financially independent if they don’t understand these details for themselves.

Consumers used to be able to rely on Social Security for some financial security in the past, but this is no longer reliable. News reports every few months are predicting the doom of the entirety of Social Security in the next several decades, so those who are paying into that system now may never benefit at all. And the ones who are currently benefiting can only consider this a supplement to their income and not exist on it entirely. Consumers must have the financial literacy to be able to plan their retirement early, or they may end up with a nasty surprise later.

There are now more options for finance than there ever have been in the past, so financial literacy is a must in order to determine which of these is best. Which type of mortgage is most appropriate for customer A’s situation? What kind of credit card is most beneficial? What is the best way to earn interest on money that is currently in savings? The answers to these questions and many others, will be different for every consumer. But no one can begin to have the answers until they understand the options.

Having a balanced budget is the best way to live within one’s means and make a financial plan for the future. But budgeting is a tricky thing and requires some financial know-how in order to do it most effectively. It is vital to know exactly where money is coming from and where money is going to. Only then can one make decisions about savings or making a large purchase.

In order to achieve financial literacy, there are several easy steps that can be taken. Contribute to a company retirement plan and start savings early. Set up an automatic savings plan so that money accumulates without much conscious thought. When shopping, make a list and stick to it because impulse buying will just drain available funds for something that is not needed. Make a budget and understand where all the money is going and what is left over. Teach small children the value of savings and that money does not simply appear when it’s asked for.

In today’s turbulent world, it is more important than ever to understand financial options and choices in order to make the best decisions possible. Things are only going to get more complex in the financial world, so this knowledge needs to be taught early in order to raise the most financially responsible next generation possible.