7 Reasons Why Financial Literacy is Important

[This is a Guest Post]

Do you feel overwhelmed with financial information? Are you confused about how to invest your money?

It doesn’t matter whether you’re rich or poor, educated or uneducated, young or old – everyone needs to learn how to manage their finances.

If you’ve never learned how to manage your money, then you’re missing out on opportunities to save thousands of dollars each year.

I’ll go over seven reasons why financial literacy is important and explain why you should learn about personal finance.

Keep reading.

What Is Financial Literacy?

Financial literacy is the ability to understand basic financial concepts such as budgeting, saving money, investing, borrowing money, and understanding how different types of investments work.

Financial literacy is not just knowing how to do the abovementioned things. Financial literacy is also knowing what’s your current financial position and what it takes to achieve your financial goals.

It is also the first step in financial planning.

Most people don’t know where they stand financially when it comes to debt, taxes, retirement savings, and other financial matters.

Yet, many still delay or forgo financial education despite having upcoming important life events like buying a home, starting a family, getting married, having children, etc., because personal finance is “difficult”.

If you want to be able to make sound decisions regarding your personal finances, then you need to have some knowledge about them.

7 Reasons why Financial Literacy is Important

It helps you budget your money 

Financial literacy is important because it allows us to manage our finances effectively. When we understand how to budget our money, we can avoid spending beyond our means and save for future goals.

It’s easy to spend money when we don’t have a plan for how much we will spend each month. But if we set aside a certain amount every week, we can prevent ourselves from overspending. We can also learn to prioritise our expenses and reduce unnecessary purchases.

There are several different ways for you to budget, including a basic monthly budget, a weekly budget, and a daily budget. These allow us to track our spending and adjust accordingly.

We can also use financial literacy to prepare for retirement. Retirement planning requires careful consideration of our current situation and long-term goals.

There are many resources available to help us figure out how much we need to save for retirement and how much we should expect to receive from our CPF Retirement Accounts.

To start, you can use the 50-30-20 budgeting rule whereby you divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings.

Of course, this can differ based on your income and monthly expenses, but the idea is to set aside a fixed percentage of your salary or any other income for your needs, wants, and savings.

You’ll learn how to fight inflation by investing

Financial literacy is important because it gives you the knowledge needed to protect yourself against inflation. When inflation occurs, prices rise over time. As a result, purchasing power decreases, making it harder to save money.

To combat inflation, you need to invest your money wisely. Investing in stocks, bonds, mutual funds, real estate, and other financial instruments can provide returns that exceed inflation rates. These investments can also help you build wealth over time.

It’s important to remember that investing requires patience and discipline. You shouldn’t expect to reap immediate rewards; instead, you should focus on long-term goals. Also, it’s essential to diversify your portfolio so that you aren’t overly exposed to any single asset class.

Investing is a complex topic, so it’s important to seek professional guidance. There are plenty of resources available online, including books, blogs, podcasts, and videos.

One of the best places to start is with a financial advisor who can explain the ins and outs of investing – which the Clearly Surely team can help.

You will learn how and when to borrow money

When you understand how borrowing money affects your finances, you can avoid making costly mistakes.

For example, if you decide to buy a home, you’ll likely need to borrow money. But if you don’t understand how mortgages work, you could end up paying more interest than necessary. And if you don’t pay back your loan on time, you could lose your house.

It’s also essential to understand how interest rates affect your monthly payments. Interest rates fluctuate based on market conditions, so it pays to shop around for the lowest possible rate.

Having a clear idea of how much you owe and when you need to repay the loan back can help you avoid financial problems down the road.

Thus, it’s important to pay off your loans as soon as possible since paying off debt early can save you thousands of dollars in interest payments.

It will help you avoid tax penalties

Financial literacy is crucial because it allows you to understand how much you owe in taxes. When you learn about financial literacy, you’ll be able to figure out how much tax you owe each year and whether you qualify for any tax relief.

For example, you might be able to deduct certain expenses from your income, such as charitable donations.

This knowledge will allow you to save money on taxes and avoid penalties imposed by IRAS.

Makes sure you have sufficient insurance coverage

When you have enough financial knowledge, you can avoid making costly mistakes that could lead to financial difficulties or worst, bankruptcy.

For example, if you own a home, you might want to consider purchasing home insurance. Homeowners insurance protects against damage caused by fire, theft, vandalism, and other events.

It’s also important to have life insurance. Life insurance provides income during retirement and after death; the latter benefitting children and grandchildren who depend on you financially – or even as a gift for them.

For life insurance, you have the option of choosing term life plans or whole life plans, so be sure to know the pros and cons of each. The Clearly Surely team can also help you with this too.

Next, you should consider early critical illness and critical illness insurance. With 1 in 4 Singaporeans at risk of cancer, you should be concerned.

Lastly, you should always have health insurance. Health insurance covers medical expenses should you be hospitalised. Without health insurance, you run the risk of incurring large medical bills that could put you into debt.

It prevents you from getting into financial problems that are avoidable

It’s easy to fall into debt if you aren’t aware of the warning signs. When you’re financially literate, you’ll be able to recognise when you’re spending too much money, making bad decisions, or taking unnecessary risks.

For example, if you notice that you’re spending more than you earn each month, you might consider cutting back on expenses or finding another job. If you’re struggling to pay off debts, you could look into refinancing options or consolidating loans.

Similarly, if you don’t know how to properly invest your money, you could invest in the wrong things and lose your money.

It prepares you for tough times

When you learn financial literacy skills, you prepare for anything life throws you. Whether you’re planning for retirement, saving for university, or just trying to pay off debt, having a solid grasp on finances will help you achieve your goals.

There are several reasons why learning financial literacy is beneficial for tough times.

First, it gives you control over your own future. Having knowledge of how to budget, save, invest, and plan for emergencies will allow you to avoid making costly mistakes.

Second, it allows you to prepare yourself for difficult situations. Learning about personal finance will teach you how to handle unexpected expenses, such as medical bills or car repairs.

Third, it provides peace of mind. Being financially literate will help you feel confident knowing you have enough resources to meet your needs.

For example, at the time of writing in October 2022, Singapore’s inflation rate was 6.74%. In simple terms, on average, prices increased by 6.74%.

If you have been financially savvy, you would probably have been budgeting and have set aside savings and have an emergency fund that you can use to tide through this period.

Suppose you have been investing; you can use it if you are struggling.

An unexpected hospital bill? Your health insurance will be there to help you.

You can prepare yourself with many things if you are financially literate – you just have to get started.

How do I become financially literate?

One of the easiest places to begin learning about finance is with personal finance blogs. There are tons of blogs written specifically for beginners who want to learn how to save money, pay off debts, and build wealth.

The Clearly Surely blog could be your start to learning more about personal finance. You can also check our blog – dollarbureau.com to learn more.

Reading about other people’s experiences can inspire you to follow suit and achieve similar success stories. For instance, you might read about someone who saved $10,000 in three months by cutting back on spending. Seeing others succeed can motivate you to reach your own financial goals.

Personal finance blogs and books can give you the knowledge you need to become financially literate. However, it’s important to remember that no single source of information is perfect. As you continue to learn about money management, you’ll gain experience and develop your own unique approach to saving and investing.

Don’t know where to start?

Just Google your question – there are many personal finance blogs that you can learn from.

Conclusion

In conclusion, financial literacy is incredibly important because it helps us manage our finances effectively. When we know how to budget, save, invest, and spend wisely, we can avoid debt and build wealth over time.

This means we won’t have to worry about paying high-interest rates on loans or paying exorbitant fees to credit card companies. We can instead focus on building a solid foundation for our future.

But financial literacy doesn’t just help us manage our money; it also gives us the tools to become financially independent. That’s why teaching ourselves these lessons early on is important.

After all, who wants to spend their entire lives living paycheck to paycheck?