What Is Financial Literacy and What Do You Need To Know About It?

 

What Is Financial Literacy and What Do You Need To Know About It?

 

You've probably come across the word financial literacy if you've spent some time reading about education or financial news recently.

The aim of financial literacy education is to help people gain a better understanding of basic financial concepts so that they can better manage their money.

That’s a worthy goal, especially when you consider a few statistics about how the typical Nigerian handles money:

Nearly four out of every five Nigerian workers live paycheck to paycheck.

Over a quarter never save any money from month to month.

Almost 75% are in some form of debt, and most assume they always will be.

Ouch! 

With those numbers, it’s no surprise that leaders in business, education and government want to help spread the benefits of greater financial literacy to as many people as possible.

Indeed, lawmakers in the United States were so concerned about this that in 2004, the Senate passed a resolution designating April as Financial Literacy Month in order to “raise public knowledge about the value of financial education in the United States and the severe implications that could be associated with a lack of understanding about personal finances.”

If more people recognize the value of financial literacy, we should ask: What abilities, characteristics, and best practices do people who are “financially literate” demonstrate? What effect does this skill set have on personal finance?

What Is the Concept of Financial Literacy?

Financial literacy refers to a set of skills that enable people to make informed financial decisions.

Don't be fooled by the term "literacy."

While knowing statistics and facts about money is beneficial, no one has fully mastered financial literacy until they can consistently do the right things with money and achieve the desired financial outcomes.

You'll be able to appreciate the big financial challenges that most people face when you have this skill set: crises, loans, savings, and more. People who are financially literate are familiar with budgeting, sinking assets, and the discrepancies between different retirement plans.  

Consumers who are financially literate have learned the following concepts:

1.  Budgeting

It's one thing to learn how to add and subtract in elementary school, but it's quite another to apply those concepts to your personal finances!

The majority of Nigerians live paycheck to paycheck, owing to a disparity between what their arithmetic suggests they can afford and what they actually spend.

People who are financially literate are more likely to be habitual budgeters who are able to save for their goals and defer gratification in order to have peace of mind now and in the future.

2.  Emergencies

Only 19% of Nigerians would be able to cover a N100,000 emergency if one happened to them today.⁽ And actually, about 40% of Nigerians wouldn’t even be able to cover a N50, 000 emergency.⁽ But people who become financially literate learn how to build a N500, 000 emergency fund—and from there, learn how to grow their emergency fund to include three to six months of expenses for those times when life throws a bigger curveball.

3.  Debt

Majority of Nigerians are weighed down with car loans, house loans, and other forms of debt which they accumulate while trying to be like others. These debts are owed to banks, multipurpose cooperative societies, microfinance banks and other financial institutions, not left behind are also shylock money lenders, town unions and all others.

To see how that debt load impacts daily living, consider the fact one of the Big Banks in Nigeria recently announced that 40% of their loan recipients spend up to half of their monthly income in debt payments.⁽

A big part of financial literacy focuses on understanding how the time and money people spend on paying off debt hurts their ability to invest in their future.

Teaching financial literacy skills in schools is becoming more popular all the time. After all, what better place to communicate these life lessons around money than in the classroom?

And you can probably guess that we believe financial literacy is as fundamental to learn as reading and writing!

What Percentage of the Population Is Financially Literate?

Based on the statistics we've already looked at, it's safe to assume that the vast majority of people have no idea how to manage their income. Although there is no one-size-fits-all method for determining how many individuals are financially literate, the lack of those skills would support the assumption.

For example, if you used the percentage of people who do not live paycheck to paycheck as a measure of financial literacy, only about 20% of people will meet the criteria!

Budgeting could be another skill for measuring financial literacy.

And how do Nigerians stack up in that department? Sadly, not even a third of people earning a paycheck (32%) stick to a budget.

On the plus side, in the United States, there is a shift in the opposite direction: more young people are improving their financial literacy through high school personal finance courses. And research indicates that it is having a positive effect! The findings of a survey of over 76,000 American students who had taken a personal finance class are strikingly different from the NFEC study. Students who had taken a personal finance course were found to have a strong grasp of key financial concepts such as:

What is the distinction between credit and debit cards? (86 percent )

How do I pay my taxes? (87 percent )

What is the difference between house, car, and life insurance? (90 percent )

What is the process of getting student loans? (94 percent )

What is a 401(k) and how does it work?

Are You Financially Literate?

Consider the following questions and offer yourself truthful answers to help you determine if you should count yourself among the financially literate.

Do you know how to make a monthly budget that covers all of your essential expenditures, bills, any outstanding debts, and a reserve fund for future purchases?

Are you debt-free right now? Or are you actively working to pay off your debts?

Do you know how much money you spend on living expenses over a three- to six-month period?

Do you have an emergency fund set up to help you get through a major life event such as a layoff or a totaled car without having to borrow money?

Do you know how compound interest works and how it helps your capital to rise over time?

Do you understand the different types of insurance you'll need to cover your finances and investments?

Are you aware of the distinction between an investment and insurance?

What are your options for taking action?

Hopefully, you were able to respond "yes" to all of the evaluation questions—or at least some of them! If that's the case, congrats! You're definitely one of the lucky ones who has truly mastered financial literacy!

Don't be discouraged if you found yourself responding "no" to any of the questions. You should take action to gain a deeper understanding of how money works.

You can begin by taking personal finance courses and/or hiring a Personal Financial Advisor; if you follow the steps below, you will undoubtedly see amazing results with your money:

1. Create a baby-related emergency fund.

Start by putting aside N10,000. This is to prevent you from getting off track when those unavoidable financial setbacks occur. (You'll be adding to this emergency fund in the future.)

2. Get out of debt if you're already in it.

You've seen firsthand how much debt stifles financial growth. Simply make a list of your debts from smallest to largest to get rid of them. Then pay them off using the debt snowball process. When you pay off the smallest debt, roll the money you used to pay it into the next largest debt. Rep this step until you've paid off all of your debts!

3. Put the finishing touches on your emergency fund.

Another field where taking a class on good money habits will benefit is in personal earnings, with many of those who do so saving an average of N120,000 per year. To complete this phase, channel all of your debt-paying energy into saving three to six months' worth of living expenses.

4. Set aside 15% of your salary for retirement.

As our research shows, it's never too late (or too early) to start thinking about retirement. Eighty-seven percent of students who take a finance class say they are confident in their investment abilities.

When you have a strategy in place that requires smart retirement investment, you will look forward to the future with optimism.

Incorporate healthy growth stock mutual funds into your portfolio.

Investing 15% of your income will help you beat inflation over time while also allowing you to put money into paying off your mortgage.

5. Put money aside for education.

Over half (51%) of students in the United States who learn about finance in high school plan to pay for college themselves. Most High School Graduates depend on their Parents or Guardians to pay for their College Education, and these Parents or Guardians may take advantage of Education Savings Accounts (ESAs) offered by most Banks and other Finance Houses.

6. Pay off your debt as soon as possible.

For most individuals, their monthly housing allowance is one of their most significant expenses. Imagine never having to give another payment and owning your house outright!

7. Continue to accumulate wealth and give generously.

Financial literacy is about more than just knowing how to manage money. The real aim is to be able to use your money to do the things you really want to do with it, such as retire with dignity, spend free time with family, and donate to others and worthwhile causes.

Communities are changing for the better as a result of financial literacy.

You should have a clear idea of where you stand in terms of financial literacy by now.

Perhaps you still have a lot to understand, but it's reassuring to know that improved financial literacy has the potential to change whole families, neighborhoods, and even the nation!

We would like to inspire teachers and educators to work tirelessly in order to provide millions of students around the country with this kind of understanding.

It would be ideal if high school graduates had a better understanding of personal finance and acquired financial literacy skills that would equip them for a lifetime of financial success.

We'd love to learn that so many young people are picking up these important skills and behaviors, and that they're changing their lives as a result.

Building wealth is more enjoyable when achieved when one is still young, as he would have more time to appreciate and enjoy what he has accomplished.

#wealthisearned