The Basics of Financial Literacy: Why You Should Care

Financial literacy can determine whether you make an informed or a questionable financial decision. Anyone can be financially literate, but financial literacy generally is not taught in schools.  By engaging in financial education, including taking advantage of resources on moomoo, you can expand your knowledge. This article will look at what financial literacy is, its components and how you can learn about it.

What Is Financial Literacy

Financial literacy means possessing the knowledge and skills needed to make informed decisions about financial matters. This includes learning how to manage your expenses, budget, save and invest efficiently.  

Financial Literacy Components

Although financial literacy has many components, with a little effort you can understand this life skill to become more financially literate.

Budgeting

Budgeting is a plan that guides how to spend your money. You can manage your financial inflows and outflows with this plan.

Saving

Saving means periodically setting aside a particular sum of money from your income. The most effective way of saving is tying it to financial goals, such as buying a house or saving for retirement.

Expenses

Expenses refer to money you spend on necessities that can include rent or utilities. Knowing what your checking account or savings account balances are after expenses is important. Check your bank account balance regularly to make sure you have enough money to pay for debit card purchases.

Career and Income

Income is the money you typically receive from employment or through owning valuable assets. If you have a thriving career, you can generate income to pay for expenses or to use for investment.

Investing

Investing means using money to buy assets in the hope that their value will appreciate over time. You can invest in assets such as real estate, stocks, bonds or gold.

Debt and Credit

Debt is money owed to another party. Common forms of debt include a mortgage, credit cards, student loans and auto loans. Credit is the ability to borrow money, goods or services with an agreement that you'll repay the debt later.

Taxation

Tax is a mandatory financial levy that a government imposes on a taxpayer to fund government spending.

Personal Financial Management

Personal finance management refers to the process of efficiently making the most of your money and assets through activities such as income generation, budgeting, saving or investing.

Financial Psychology

Financial psychology refers to emotions and attitudes toward finance or money. Your attitude toward spending decisions usually determines how much money you can save. Market psychology can also determine trends in financial markets.  

Why is Financial Literacy Important

Financial literacy can help you make progress toward building wealth. Below are some benefits of being financially literate:

• Create a structured budget: A  budget helps you pre-plan saving and spending decisions more efficiently. You would be able to know which areas you need to cut down spending or how to live below your means.

• Repay and avoid debt: Through financial literacy, you become knowledgeable of the damaging effects of debt and its long-term consequences for achieving financial independence. As such, you can learn strategies to minimize debt totally or repay it faster.

• Analyze assets strategically: Another benefit of financial literacy is gaining fundamental or technical knowledge about investing. Armed with knowledge, you can analyze assets strategically and make informed trading decisions.

• Prepare for emergencies: Being financially literate means preparing for the unexpected. Building an emergency fund of a few months worth of expenses can help pay for unexpected events like a job loss, which may affect your finances.

• Reach your financial goals: If you set clear financial goals and a plan to work toward them, you’ll have a better chance of achieving them.

• Plan for a secured retirement: Financial literacy equips you with the skills to build a financial cushion for your retirement through investments or retirement savings like a 401(k).

How to Become Financially Literate

Becoming financially literate is a journey with plenty of support available.

Check Free Resources Online

You can use numerous free resources to gain financial education. Many reputable financial websites are available if you want to read up on common financial issues such as budgeting, investment and savings.

Develop a Budgeting System

You can develop a budgeting system by listing your income, focusing on your needs and priorities and canceling whatever is not important. Also look for areas where you can reduce your spending like by canceling monthly subscriptions.

Pay Off Your Debt and Bills

Debt and bills are expenses that can keep you away from your financial goals, especially if they pile up. Paying your debts and bills on time is important for staying on track.

Start Saving for an Emergency Fund

An emergency fund is a fund you set aside for unexpected expenses. Even smaller amounts that you save regularly are a good start — the key is staying consistent.

Invest in Assets and Diversify Your Portfolio

Investing helps you move towards securing your future financially. The goal is for your investments to grow. Diversifying your portfolio with different assets is a risk-management technique that investors use to try to increase returns.

Note: Asset allocation is an investment strategy that can help manage risk within your portfolio, but it does not guarantee profits or protect against loss in declining markets

Get Your Credit Report

Getting a credit report allows you to confirm its accuracy. Your credit history is important and factors into your ability to borrow money for larger purchases or to qualify for credit cards. You may also be able to spot instances of identity theft from errors in your credit report.

Consider Credit Counseling

If your credit score is low, you can consider credit counseling to learn strategies on how to manage your finances better and reduce your debts.

Keep Building Wealth

As you use the financial skills you learn, you can take steps toward reaching your financial goals. Paying bills on time, saving more and investing in a diverse long-term portfolio are all principles investors use to help build towards long terms wealth. Effective wealth management typically involves investing strategically and being responsible with your money.

Example of a Financially Literate Person

For example, say you are in your late 20s to early 30s, and you want to try trading stocks or options but don’t have a background in finance. You can read books or resources online to learn about financial concepts.

You can also look for authority figures such as financial experts with a solid reputation and years of experience to learn from.

Take charge of your financial life

Financial literacy enables you to take charge of your financial life by equipping you with skills to help make better financial decisions. By having a keen understanding of how to manage your finances, you have a greater chance of achieving financial goals.

Interested in learning more about investing?

Moomoo provides comprehensive educational resources for all skills level from beginner to advanced traders. For advanced traders, who wants to test their new strategies and advancing their skills, they gain free access to our paper trading app.  When you download the moomoo app, you’ll have access to free lessons, research tools and paper trading.