When asked about our ability to spend money wisely, most of us are confident that we know what we are doing. However, when explicitly asked about financial terms such as inflation, compound interest, and investment diversification, the results aren’t that positive across the board.
According to an extensive study conducted by the World Bank, literacy levels vary from 13% to 71%. And, if people from Northern Europe and other privileged regions are equipped with the knowledge needed to make wise financial decisions, millions of people lack even basic financial concepts.
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Why is this important?
Because financial literacy is key to competent money management. And because by investing in financial literacy, you can avoid some of the biggest personal finance mistakes and grow your wealth even during times of economic uncertainty.
The devastating consequences of poor financial literacy
One of the most common misconceptions about financial literacy is that it’s something that only professional investors and people working in finance should know. That’s not true. We all use money, and it’s never too early to start learning about it. In fact, some experts argue that teaching financial concepts can be done from as early as three years old, as long as you use age-appropriate resources.
According to a FINRA survey, only 34% of Americans answered four of five basic finance questions. On average, 53% of adults are anxious about money, and a major source of this anxiety is caused by the fact that they do not know how to manage their own finances and plan them in the long run. Financial literacy rates tend to drop after the age of 50, with the lowest rates reported in the 65+ segment.
As for the repercussions of poor financial literacy, these can be quite serious and even drive people to the brink of bankruptcy:
- Although access to financial services continues to grow, people with low financial literacy will not choose the right services for their particular situation. For example, they may rely too much on credit cards for non-essential purchases, which leads to a rise in credit card debt.
- People with poor financial literacy do not know how to plan for their future by choosing the right pension plan.
- People with poor financial literacy are more likely to spend too much on transaction fees, get loans with high-interest rates, and pile up bad debt.
- People with poor financial literacy are less likely to save money and do not have an emergency fund.
- People with poor financial literacy do not invest their money. If they do, they are more likely to fall for scams, invest in assets they are not familiar with, miscalculate their level of risk, and generally take unsustainable decisions.
We have reached a stage when people live longer than ever before. Unfortunately, 60% of seniors are confident in their future and fear that they haven’t made the right financial decisions.
Reliable sources of financial education
Many people assume that financial literacy is only taught in schools, but school is only one source of education. At present, efforts are being made to make financial literacy more accessible and also more appealing.
Contrary to popular belief, becoming financially literate isn’t about memorizing entire pages of theory about monetary policies and banking history (in fact, this approach is one of the least effective ones and unless you want to become a pro-investor, you can skip it).
Instead, financial literacy aims to teach you everyday money skills, such as:
- How to apply for and use a credit card
- How to use an ATM
- How to apply for a loan
- How to do your taxes
- How to make wise investment decisions, such as finding a reliable binary options broker, Forex broker, or cryptocurrency wallet.
- How to use various payment options (unfortunately, many people still rely only on cash payments and don’t know how to make wire transfers or use payment platforms such as PayPal or Skrill).
- How to figure out which financing option is right for you
- How to read “the fine print” when choosing financial services and tell a scam from a legitimate offer
- How to save your money and set up an emergency fund
- How to plan for retirement
- How to create a budget and stick to it
- How to pay off debt…
… and much, much more.
So, how can you learn all these things?
Some of us have familiarized ourselves with some of these concepts in schools, but that’s necessarily the most comprehensive source of education, simply because school focuses mostly on theory, not practice, and because things can change rather quickly after graduation. For example, digital payments didn’t exist 20 years ago, so financial literacy is continuous education.
The best way to develop financial literacy is through practice, and examples are much more fun and diverse than you think. Take Elon Musk – he bought his son Dogecoin, an affordable, low-risk cryptocurrency, to teach him the economics of supply and demand.
Ultimately, the best way to boost your financial literacy is to read about it as much as possible. Not necessarily economics textbooks, because the way information is presented there may be a bit too abstract. Still, beginner guides that break down financial topics into bite-sized chunks explain them in plain English and give practical examples.
Also, if you don’t know exactly where to start, don’t worry. No one learned everything in one go. Start with a topic that interests you, and work your way up from there. For example, if you’ve received a promotion recently and don’t know how to put the extra money to good use, you can start reading online guides about investments.
Or, if you’ve never made a digital payment before and you’re curious about how it works, you can read a top of the top digital payment platforms.
Social media is also a good source of information, as long as you practice caution and only follow reliable profiles, such as experienced investors, not questionable influencers.