An Overview of Financial Literacy

Diya Garg
Jun 3, 2021
3 min read

Updated: Jul 21, 2021

You might be wondering: What is financial literacy? Why is it important? How do I become financially literate?

Here are the answers to all of those questions:

WHAT is financial literacy?

Financial literacy is the ability to understand and effectively use various financial skills in daily life. In other words, it is knowing how to manage your money.

The 7 components of financial literacy are budgeting, borrowing, spending, saving, investing, protecting, and earning. These are also known as the pillars of financial literacy as they form the backbone of financial literacy.

For instance, a financially literate person would allocate their money to their needs, wants and savings wisely, which enables them to explore other areas of business and finance such as investing and entrepreneurship.

WHY is financial literacy important?

If you want to have financial freedom and not be worried about financial issues, you’ll have to be financially literate.

Financial literacy is a critical skill to have because of its numerous advantages:

It enables one to make informed decisions relating to life goals such as education and entrepreneurship, and it also increases the chances of being successful in these areas.
With an increase in the use of credit cards and online transactions, people have become more vulnerable to financial fraud and often lose a lot of money. But being financially literate solves this problem and prevents people from falling prey to these scams.
Financial literacy helps you use your money wisely and it prevents poor spending decisions which may lead to financial instability. It allows you to be prepared for the future in the case of a financial emergency.
In addition to this, financial literacy also has a crucial role in the economy. It alleviates poverty by reducing financial mismanagement, which has several benefits such as improved access to education, economic growth, and better standards of living.

Although there are so many benefits of financial literacy, only 24% of the total Indian population is financially literate. This is why spreading awareness on this topic is a pressing need.

HOW to be financially literate?

Here are some tips you can implement in your lives to become financially conscious:

Keep track of your spending- Record the amount of money you spend to purchase items and the amount of money you may receive and calculate your net spending.
Know your household expenses- This will give you an idea about the amount of money allocated to each of the goods and services purchased by your household. It will also prepare you for the future.
Differentiate your needs and wants- Needs are goods and services that are essential for survival such as water, clothing, medication, etc. Wants, on the other hand, are goods and services that are desired but are not necessary for survival, such as fast food, gaming equipment, etc. By differentiating between the two, you will learn how to prioritize spending on needs rather than wants.
Create a budget for shopping- This will prevent overspending and will encourage habits of budgeting and saving.
Think through the financial decisions you make
Talk to adults about how they manage their money- By talking to someone with experience managing money, you can learn what methods work for them and what don’t. You can implement these techniques in the way you manage money.

You might think that there is a huge scarcity of money and making more money is impossible. However, this is not true and in reality, there is a lot of money in the world, but only the ones with the skills and knowledge of financial literacy can acquire it.

Financial literacy is an important life skill for everyone to have and it is the foundation of your relationship with money.