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Financial Literacy And How Important It Is

Financial literacy refers to the cognitive knowledge of financial concepts and skills, such as budgeting, investing, borrowing, paying taxes, and managing one's finances. Being financially illiterate means lacking these abilities.

The Financial Industry Regulatory Authority (FINRA) estimates that around 66% of Americans lack basic financial literacy. Moreover, 40% of Americans need help to cover a $400 emergency bill.

It is, therefore, crucial to know how important financial literacy is and how to manage your expenses which we will discuss in this article.

What is Financial Literacy, and Why Is It Important?

Financial literacy aims to improve people's knowledge of basic financial concepts so they can handle their money more effectively. It is the ability to understand your finances. A lot of information is available to educate you on your financial situation. It covers various topics like saving, investing, paying off debt, budgeting, etc.

Over time, focusing on knowing more about even a few topics will help you achieve stability in your finances. Learning about financial literacy is a worthy goal, especially when you consider some of the following statistics:

  • One hundred twenty-five million Americans live paycheck to paycheck or 54% of the population.

  • In the United States, young adults aged 18 to 23 have an average debt of about $9,593.

  • The personal saving rate for August 2021, as reported by the U.S. Bureau of Economic Analysis, was 9.4%, a drop over the previous months.

Although it can't be developed in a single cram session, financial literacy sets the tone for your relationship with money. Starting your education today will pave the way for success in the future.

Why Is it Important?

In today's society, financial literacy is essential due to regular aspects of life. It includes student loans, mortgages, credit cards, investments, and health insurance.

Financial illiteracy has not only an impact on your future but also your present. When you need to know your options or have the correct information on these matters, you run the risk of collecting a substantial debt. There are also more chances of taking out loans with high-interest rates and lowering your credit score.

Consider how having financial literacy can improve your life:

  • Taking on high-interest rates: Doing your research to find the lowest interest rates will help you save money in the long term. Attempting to pay off monthly credit card bills will also prevent the accrual of interest charges.

  • Paying off debts: As your balance grows with interest, taking on a significant debt load might occasionally seem overwhelming. But there are numerous strategies for efficiently paying off debt. Using financial literacy, you can choose the best debt payback option for your specific situation.

  • How to protect from bankruptcy: Making an emergency fund is a smart move to stop debt build-up. A financially literate person knows how much money to set aside for specific expenses and strives to keep that money in savings all the time.

Basics of Personal Finance

There are a few essential budgeting and money management tips that apply in any circumstance:

  1. Track all income and expenses.

  2. Identify your needs.

  3. Keep tabs on your cash flow for two to three months and then analyze it.

  4. Build savings.

  5. Create a budget.

We hope this article helps you understand financial literacy and why it is essential for our present and future.

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