The meaning of financial literacy and its importance

Financial literacy is the ability to understand how money works: how someone makes, manages and invests it, and also expends it (especially when one donates to charity) to help others.

In-depth knowledge of financial literacy is required to understand how money works and how it can work for you – even when you’re sleeping – by investing in profitable areas like the stock or money market. To understand money and how it works, it’s important to understand common financial literacy principles such as; financial goals, budgeting, investments, superannuation, contracts and employment models.

Research studies across countries on financial literacy have shown that most individuals (including entrepreneurs) don’t understand the concept of compound interest and some consumers don’t actively seek out financial information before making financial decisions. Most financial consumers lack the ability to choose and manage a credit card efficiently, and lack of financial literacy education is responsible for lack of money management skills and financial planning for business and retirement.

Most potential retirees lack information about saving and investing for retirement. Many people fail to plan ahead and they take on financial risks without realizing it. Problems of debt are severe for a large proportion of the population because of financial illiteracy. Youth on average are less financially capable than their elders.

Financial education can benefit consumers of all ages and income levels. For young adults just beginning their working lives, it can provide basic tools for budgeting and saving so that expenses and debt can be kept controlled. Financial education can help families acquire the discipline to save for their own home and/or for their children’s education. It can help older workers ensure that they have enough savings for a comfortable retirement by providing them with the information and skills to make wise investment choices with their individual pension and savings plans. Financial education can help low-income people make the most of what they are able to save and help them avoid the high cost charged for financial transactions by non-financial institutions.

Your level of financial literacy affects your quality of life significantly. It affects your ability to provide for yourself and family, your attitude to money and investment, as well as your contribution to your community. Financial literacy enables people to understand what is needed to achieve a lifestyle that is financially balanced, sustainable, ethical and responsible. It also helps entrepreneurs leverage other people’s money for business to generate sales and profits.

By Christiana Mbazigwe, Duric Business Solutions, Toronto, ON, CYBF mentor