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Financial Literacy

10 minutes
Intermediate
Cristian Cochintu
Cristian Cochintu
29 August 2024

Financial health is the foundation of success, and financial literacy is essential for navigating through the current financial landscape. Whether we are talking about daily spendings, saving for the future, or investing in your family wealth legacy, achieving your goals requires understanding your money and what it can achieve.

The world of finance can seem complicated, but it's critical to have a fundamental understanding of how money influences our social lives, health, education, and everything in between. Finance is a language like any other: the more fluently you speak it, the farther and more comfortably you may “travel”. The growing complexity of the economic landscape and globalization have brought to the spotlight the need for financial literacy and education.

Financial literacy is about having the knowledge and the confidence that could help you effectively manage, save, and invest money for yourself and your family. This can entail getting out of debt, sticking to a budget, purchasing insurance, researching investments, and developing retirement plans. In an increasingly complex world, being financially literate is not necessarily about gaining wealth, but rather about maximizing your resources and making the most appropriate financial decisions.

Financial Literacy - Key Takeaways

  • Financial literacy refers to the capacity to understand and implement fundamental economic principles such as spending, money management, saving and investing. 
  • Financial literacy is vital for making educated financial choices and accomplishing financial objectives, by making better financial decisions and improving overall financial well-being.
  • An individual with good financial literacy comprehends topics like saving, investing, compound interest, interest rates, and money planning.

    

What is Financial Literacy

Financial literacy is more than just managing money. It covers a wide range of knowledge skills that allow you to navigate the complex world of personal finance, plan and achieve your goals. International institutions and researchers have defined financial literacy in a variety of ways.

For some, financial literacy refers to the understanding of how to earn, manage, and invest money and has a critical impact on peoples' ability to make smart financial choices.

Others may describe financial literacy as not only knowing and understanding basic financial concepts and risks, but also having the skills, motivation and confidence to use that information when making financial decisions.

Financial literacy definition: According to the National Bureau of Economic Research (NBER), financial literacy is “peoples’ ability to process economic information and make informed decisions about financial planning, wealth accumulation, pensions, and debt.”

Nowadays, financial literacy has become almost as important a skill as reading, writing, and math skills are, and thus everyone should have knowledge about it to “survive” the complex current financial world

Why is Financial Literacy Important?

Financial literacy is and will be important if people have financial goals. Our understanding of budgeting, investing, and personal money management determines how we achieve those goals.

People make financial decisions every single day, so financial literacy is critical for everyone, not just for those in charge of managing budgets. The more you know about money, the greater your prospects of financial security, both now and in the future. It might also help you stay out of debt, save money and grow your wealth.

If you have a solid understanding of financial fundamentals, you could make sound investment selections and save for rainy days or retirement. Financial literacy may also help you prepare for unforeseen expenses and diminish anxiety about your daily life by preparing yourself financially for the unexpected.

Nevertheless, being financially literate could help you make smarter financial decisions and prevent costly mistakes. For example, someone who does not understand how credit card interest rates work may be unaware of how expensive it is to hold an unpaid balance, leading to debt—though high spending and low income are also common reasons.

Everyone should be able discern the risks associated with borrowing or investing money. Financial literacy can assist individuals in planning for the future, making better decisions about what to do with their money, and investing in financial markets in a way that suits their requirements. This will be much more crucial for people and businesses, especially during economic recessions or unexpected events, such as COVID crisis.

The Four Pillars of Financial Literacy

Earning

The idea of earning is fundamental to financial literacy. It's about learning new skills, going to school, and getting a job or a business that provides a consistent income. Gaining more income potentially allows you to flourish and achieve financial stability. Your income serves as the cornerstone of your overall financial stability.

Spending

Your spending habits have a huge impact on your financial path. Being aware and deliberate with your spending may lead you faster to your financial independence. Track your spending by using apps or tools for budgeting. This knowledge enables you to spot spending trends, make the required corrections and save money, or pay your debts.

Saving 

Establishing a powerful savings habit is essential for financial stability. A well-organized savings strategy includes monthly income contributions, emergency fund creation, and the pursuit of short-term goals. Cut off unnecessary costs and save the money for rainy days, using vehicles such as a high yield saving account or a money market account.

Investing

Educate yourself about different investment options such as stocks, bonds, mutual funds, and real estate. Work toward diversifying your portfolio to minimize risk and maximize potential returns. This may allow you to increase your wealth and empowers you to make big financial decisions, such as purchasing a home or preparing for retirement.

Naturally, there is no one appropriate approach to becoming financially literate, just as there is no single right way for everyone to live their financial lives. Many techniques can be effective, reflecting the range of people's circumstances, opportunities and aspirations.

The Benefits of Financial Literacy

Financial literacy has an influence that goes beyond personal well-being. It is essential to social progress and economic resilience. Financially literate people become more competent to make decisions which are good for them and for the economy. Here are some of the major advantages of becoming more financially literate:

1. Cultivating better spending habits

Financial literacy can help you stay in control of your spending habits. Tracking your expenditure allows you to manage your expenses, develop budgets, and prepare for long and short-term financial planning. Because you know how much you spend, you can decide whether to cut back to meet your goals or to better budget your money so that you have additional money to spend on critical matters. For example, you may reduce your credit card expenditures to pay off debt faster.

2. Realizing the importance of saving

Financially literate people frequently know how to save money more wisely. You may create a plan for how to save money by using your budget. You may be saving for a specific reason, such as to fund a major purchase, or you may just wish to put money aside for unexpected expenses. For example, financially literate people, may want to search for the best rates on their savings instead of keeping cash in a vault.

3. Understanding complex financial principles

Gaining greater financial literacy can aid in improving your understanding of nuanced financial principles such as inflation, rate of return, appreciation and depreciation, and investing money. Having a good understanding of these concepts can help you better understand how money moves around within an economy, what influences its value, and how to manage your finances to build wealth over time. For instance, you may study how inflation lowers the value of the dollar and drives up interest rates to counteract it.

4. Making investments accessible

Although they might seem complicated to understand and risky, investments could be an excellent way to increase your wealth. Financial literacy provides insight into which sectors of the economy are worth investing in. Specifically, it enables you to make sound investing selections. It assists you in forecasting the economy and predicting what the future may bring, which can help you make informed financial decisions. Instead of having money sitting idle in your account or in a safe, you might consider investing it into a business or investment alternatives such as stocks, bonds, or REITs, that might pay dividends or generate passive income. Moreover, it will help you assess your comfort level with risk in relation to your financial objectives. Each has a different balance, so it's important to know how much risk you can tolerate.

5. Avoiding costly mistakes

With financial education, you can avoid costly mistakes such as acquiring too much debt, getting into naive loan traps, or making unwise choices. With awareness, you will recognize potential risks in the financial landscape and know how to avoid them. Once you have the tools for effectively managing your money, you will gain confidence and feel safer about them. Making decisions that line up with your objectives and values may even help you sleep better at night knowing you've established the groundwork for financial independence.

How to Become Financially Literate

Lifelong learning is key to financial literacy. There are plenty of resources available on money management, financial literacy, and the benefits of starting early. But if you're just getting started with your finances as an adult, don't worry. Lessons taught as a youngster are still relevant today, if not more so. Fortunately, there are simple measures you can do right now to improve your financial literacy, regardless of your age.

Take a Financial Literacy Course

Financial literacy integrates personal finance, financial principles, and financial planning to assist individuals in building wealth and achieving long-term stability. It can be difficult to make proper financial decisions if you are unaware of the various financial principles. Wealth is made up of numerous components, and cash is just one of them. Stock trading, savings, bond investing, real estate investments, passive income, compound interest investments and business ownership are all potential strategies to increase your net worth. A financial literacy course is required to approach each of these methods and more.

Read Financial Literacy Books

Navigating the world of finance and investment is difficult. It's more than just learning the difference between stocks and bonds or how mortgages work. It's about developing a mindset that prioritizes sound financial decisions in all aspects of life. 
Consider this: the financial decisions we make today can have a long-term impact on our lives. Most financial literacy books are laden with jargon and difficult-to-follow advice. However, several well-known publications are usually regarded as excellent starting points in terms of financial literacy resources.

Find a Balanced Approach between Saving & Investing

"Saving" and "Investing" are two of the most common terms in the context of personal finance nowadays. Acquiring an understanding of these financial principles is essential, not only for your financial literacy, but mainly for safeguarding your financial future. It becomes increasingly important as we deal with the increasing complexity of contemporary finance. They are both ingredients that play very different roles within your financial goals’ recipe. The way you approach each depends on your goals, risk tolerance and time horizon.

Learn as Much as You Can and put Theory in Practice

Finance management, saving, investing, and optimizing your finances generally? Well, it may sound a bit overwhelming, it is true. Whether it’s courses, books, articles, or videos, let your brain start absorbing the information. Conceptual, theoretical understanding is a useful starting point but doesn't compare to learning by seeing. As mentioned above, financial literacy is not only about understanding but also being able to apply and make decisions in real time. No number of courses, books or articles are going to help if you don't put your learning to practical use.

However, it is crucial to never forget that all should be seen as an educational resource and not specific personal financial advice.
And, more important, you should enjoy the journey. Financial literacy is a never-ending journey of learning and improvement. It's not a duty, it's an option.

Getting Started with CAPEX.com

  • Take your first steps to becoming financially literate with our educational resources available at Capex Academy. You will find a lot of free trading courses for you to choose from and they all tackle a different financial concept or process.
  • To start putting theory into practice and benefit from the acquired knowledge, you would have to open a live account to deposit funds and pick the asset that you want to invest in.
  • Alternatively, you can open a demo account to practice your trading or investing with $50,000 of virtual funds.

 

Conclusion

Financial literacy is the capacity to make wise financial decisions by understanding the nuances of personal finance. It entails cutting spending and creating a budget, figuring out how much savings are necessary and identifying advantageous investment options that can be implemented to reach your goals or financial freedom.

Your dedication to financial literacy will ultimately pay off in the form of a greater sense of security. You will have confidence in your capacity to make wise financial decisions, stay away from debt or big risks and make educated choices. From there, you may decide which financial objectives will best help you achieve your potential goal. 

Free resources

Before deciding to start your journey towards financial literacy, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.

Our demo account is a suitable place for you to get an intimate understanding of how trading and investing work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged securities.

Sources:

https://www.oecd.org/en.html 
https://www.weforum.org/
https://finance.ec.europa.eu/

FAQs about Financial Literacy

This information prepared by capex.com/en is not an offer or a solicitation for the purpose of purchase or sale of any financial products referred to herein or to enter into any legal relations, nor an advice or a recommendation with respect to such financial products.This information is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation or the particular needs of any recipient.You should independently evaluate each financial product and consider the suitability of such a financial product, by taking into account your specific investment objectives, financial situation or particular needs, and by consulting an independent financial adviser as needed, before dealing in any financial products mentioned in this document.This information may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Company’s prior written consent.Past performance is not always indicative of likely or future performance. Any views or opinions presented are solely those of the author and do not necessarily represent those of capex.com/en 

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Cristian Cochintu
Cristian Cochintu
Financial Writer

Cristian Cochintu writes about trading and investing for CAPEX.com. Cristian has more than 15 years of brokerage, freelance, and in-house experience writing for financial institutions and coaching financial writers.