What is Financial Literacy and why it is important?

Share this post:

Updated on: 04 Mar 2024

We all want to live life as per our wishes but after disposing of liabilities hardly we left with money that we can spend on us to live life with freedom.

If we are really serious about this freedom in life then “Financial Literacy” is one of the ways by which we can achieve freedom in life, especially in terms of finances.

This financial literacy is very much necessary for people who are earning money and taking care of the liabilities of the family. And if you are practicing from a young age when you start earning then it will work for you the best.

Even at a later age, this will help us to arrange our finance and helps a lot to get good returns by our saved available money & assets.

Just knowing about financial literacy it is not sufficient. One should learn, practice and implement religiously then it will work.

What is Financial Literacy?

If you search the definition of financial literacy then you found “The ability to understand and effectively use of various financial skills like personal financial management, budgeting etc. is called financial literacy”.

You get lot many such definitions of financial literacy but if you simply want to understand then…..

“Usually everyone is working for money but if you know Financial Literacy then money works for you”.

And if you keep your money on work then one fine day you get regular ample monthly income from your investments & assets so you need not to work just to earn money. 

The Component of Financial Literacy

Five major components of financial literacy that teaches you to arrange your finance in the right way. If you learn, practice and implement these five components then money will start working for you.

  1. Know your money closely
  2. Spending behavior
  3. Saving
  4. Investing
  5. Protection of money

1. Know your money closely – After earning money many of us start saving money and planning for investment without knowing our own money closely. This is happening as we do not know the mechanism to know our money closely.

We should be very much aware of even our single rupee which we have saved and invested somewhere.

Generally, we do not know very basic things about our money like…..

  • How much money do I have as on today?
  • How much money do I have in which bank or Institution or Scheme?
  • How much earning per month I am getting from my investments?
  • How much corpus of retirement do I have?
  • How much cash is available to me for my any emergency needs?
  • How much money I have invested in Real Estate Properties and what is the present value?
  • How much monthly Rental income I am getting from all my Real Estate Properties?
  • How much gold, Silver …..etc I have and I kept where?
  • What is the present value of gold, silver?
  • What is in my bank Lockers?
  • Who are the nominees of my investments?
  • How my Spouse or Successor will come to know about my money & investments after me?
  • If I am having all the details then I can plan my investments properly and get good returns.
  • Where is the personal info of mine & my family members like PAN, Aadhar, Passport, Driving License, birth certificate etc.?
  • What are the credentials of my accounts like user ID & password and how I can keep this in safe custody?

These very basic pieces of information we do not know correctly and even do not know what the right way to get it is. Many times we forgot the investment made which we have done for a long tenure.

Another funny expect is that we are completely relying on banking or investment portals/ websites and on those online platforms many times we see that we are not able to access our own account due to server down or forget credentials or sometimes showing wrong information. As we do not keep any record of investments, we have no choice but to accept what information is available on online platforms.

It shows that we do not know about our own money.

So one should be very aware of own money which is available with us even a very small amount too. Once you know this first and very important step to “Know your money closely” then you can understand well other steps of financial literacy.

2. Spending behavior – We generally start saving randomly without understanding our spending habits. With this lack of information on spending habits, we are not able to save desired savings that we are generally planning.

If you understand your spending habit well then you can do some corrections in your spending habit that will help you to save an amount which you can invest in schemes or assets.  

To know your spending behavior well, you should track your monthly expense for upcoming at least three months. If you do that then you get to know where your money is going and you can stop the wastage of money where you are overspending.

Understanding your spending behavior is very much necessary as this will tell you how you can stop wasting your money and can able to save as much which you can invest in any scheme or asset to get a return on investments. This return on investments will be an effortless income in addition to your regular income which you will just get by your knowledge of financial literacy.  

Along with time, this effortless income increases in such a way that it exceeds by your regular income.

3. Saving – Once you are aware of your money & investments by the method of “Know your money closely” and “Spending Behavior” then you get to know two very important things.

First by method of “Know your money closely” you get to know how much income per month you are getting from your investments. Once you see every upcoming month due to your regular saving, monthly income by investments increasing then it will give you the motivation to enhance your monthly effortless income by more n more savings.

The second one is if you understand your “Spending Behavior” then you can easily stop wastage of money and can able to save more which you can invest to enhance your monthly income by investments.

These practices “Know your money closely” and “Spending Behavior” will help you to save your money in an organized way.

4. Investing – Investing is an art by which you can multiply your saved money at a very faster pace. You should learn that art with help of reading books or internet blogs & videos.

On the internet, you can see many people are teaching and guiding about investment and investment options/schemes but you should be very much careful as many are just selling products or increasing traffic by giving you lucrative risk investment options where you may lose your hard-earned money.

Before investing, take your wise decision to keep your financial investment portfolio balanced where you can able to invest in Secured, medium risk and higher risk investment options and also keep investing as retirement corpus fund which will grow slowly but after 10 years it will grow at a very faster pace due to compounding effect, this only you realize in the long run when you continually invest money every month or year as a retirement fund.     

5. Protection of money – Just to get higher returns we generally start investing in the option where returns are very much higher. Even sometimes these options multiply your money in a very short duration. But one should understand that as much you get more returns your risk to lose money is very much higher side.

So while investing you should be very much aware of what l you can lose. So always keep your financial investment portfolio balanced where you can able to invest in secure, medium risk and higher risk investment options so if you lose something it should not impact your investment portfolio.

Protection of money is a very much important aspect of “Financial Literacy”.

These five components of “Financially Literacy” will help you lot to face any financial crisis in life and it will keep you stable and sustain your life in a crucial time.

From our childhood till the start of adulthood, no one is educating about “Financial Literacy” which can very much help us to live life with ease.

We should understand that in the present time money has created its own importance and you need money to sustain life first and then to live life comfortably. So “Financial Literacy” is the way by which you can achieve these both things in life if you practice religiously. If you are really serious about freedom in life then start practicing Financial Literacy immediately irrespective of your age.

Share this post:

About the author

Vivek Rai

Hi this is Vivek Rai. I am a blogger,

I am helping people to live their life peacefully, gracefully and guiding them to invest our valuable money & time in such a way so we need not to work for money and we can live our respectful life with quality lifestyle.

View all posts