Those days are long gone, when cash used to be the sole medium of carrying out transactions. It has a lot to do with how transactions are being carried out these days. Earlier, there was no concept of online shopping, trade used to be carried out between individuals, in person. Besides, the concept of credit was not as popular as it is today. Overall, there has been a drastic change when it comes to the entire financial scenario.
Talking of credit, the banks, different financial institutions, credit card companies are showering their consumers with all kinds of credit opportunities. There are so many different options which are available these days. Consumers can have multiple credit cards, they have the option of paying one off with another. However, without proper knowledge there are chances that one might get into a serious financial tangle! This is why, it is very important to have a clear understanding about some of the basic aspects of the modern day finance.
Most of the people have very little or no understanding about finance. They have no idea as to how credit cards operate, and how they can affect their financial life for many years down the line! As a matter of fact, the lack of proper financial knowledge is one of the main reasons which lead to investment and savings problems for most people.
Every year, in America, FINRA, which is the banking and finance regulatory body, issues a test consisting of five questions. It is a part of their National Financial Capability Study. This test is conducted to measure and asses the knowledge of the consumers when it comes to rate of interest, inflation, compounding, bond prices and diversification. Only 34% got four questions out of five correct! This clearly suggests that the basic financial and economic principles that underline these problems are spread all across the society
What is Financial Knowledge?
Financial knowledge or literacy is a combination of debt, financial and credit management and the knowledge which is required for making responsible and rational decisions. Decisions which can affect the everyday life of a consumer. Financial knowledge includes a clear understanding on different aspects like how a checking account operates and what is the mechanism that works for a credit card. To sum it up, financial knowledge has a great impact on the daily life of a person. With the right knowledge, it becomes easier to t make proper budget, make investments, do savings and take other important decisions pertaining to financial aspects.
Lack of financial knowledge is considered to be a huge problem in all kinds of economies. It has been observed that people from the most developing economies also do not have a strong hold on different important financial principles which is very important to understand the financial scenario and also to manage different types of financial risks in a proper manner and to avoid financial hazards. A recent study has revealed that people from all across the globe, from Korea to Germany to Australia have very little or no understanding about the basics of finance.
The level of financial knowledge depends on two major factors; one, the level of education, and two, level of income. However, studies show that people with higher education and more income can be as ignorant about various financial issues as the less educated section and lower income group. The sad part of the story is that people are not eager to learn! What they don’t realize is this can make a world of difference as far as their finance is concerned, if they had a clear and vivid understanding about finance.
Why it is Important to be Financially Literate?
As mentioned, lack of financial knowledge can invariably lead to different types of issues. Therefore, it is absolutely essential for the consumers to have some basic knowledge on how the financial mechanism operates. Here are some reasons.
- Helps to Manage Debt: It is very important for people to know how to manage their debts. If someone can manage debt in an effective manner, you have won half of the financial battle. Financial knowledge is required in order to understand and manage debts.
- Helps to make Budget: Making a realistic budget is a very important thing; irrespective of the financial condition. We must have a sound grasp on the various financial parameters and it is not possible to prepare a full proof budget. It can only be achieved with the help of proper financial knowledge and education.
- Understanding of the Emergency Fund: In urgent situations, emergency fund is what comes to the rescue. But how to make one? What are the different options one has? And most importantly, how to ensure that it is being optimally used to yield the best of results? Answer to all these important questions can only be attained by financial literacy
- Retirement Plan: Nobody works forever! Nobody earns throughout thier life! Retirement is one of the most important aspects which needs to be taken into consideration. With proper financial knowledge, it becomes easier to plan for the retirement in an effective manner.
- How to Handle Credit: As long as one knows the various aspects about credit and how it works, it becomes easier for him to handle credit and creditors.
These are some of the reasons as to why it is important to be financially educated. There are various ways to go about it. Materials and articles are available over the internet, there are crash courses which one can attend. Besides, one can also learn from practical experience. However, what is important is to have the desire to learn. Sadly, this is what is missing in most of the people. What they don’t realize is their life would be much easier and smooth if they had the required financial knowledge under their belts. It goes a long way and really pays good dividends.