6 Reasons why Financial Literacy is so important

06 May 2016

Without knowledge of how money works, you can not be wise enough to know how to use it properly. Using it properly does not only mean earning and spending it. There’s a lot more to it than that.

If you haven’t heard about the term “Financial Literacy”, then it’s not surprising because in a country like ours, it isn’t integrated to our education system yet. So, you don’t get to hear much of it unless you’re really looking for it.

This is the Wikipedia definition of the term.

Financial literacy is the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others. — Wikipedia.com

Here are the 6 Reasons why I feel financial literacy is so important.

1. Helps you to save and spend better

Although it is important to keep track of your expenses and income, it is more important to make wise and hard decisions to manage your money. Most people pay all their bills first, then the rest gets spent some way or the other. Kiyosaki says it would be a better strategy psychologically to save/invest first, then pay the bills with the rest.

2. Live debt free

Those with low financial literacy borrow more, tend to buy on credit, and are unable to pay their full balance each month and end up spending more on interest fees. With best financial practices you wouldn’t have to live on debts, because you would plan in advance for emergencies and other large expenses.

3. You can avoid paying more for many financial products

Without the awareness of which financial product is more suitable for you, you end up buying something which doesn’t suit your economic situation. People without financial literacy, buy more on credit and end up paying more interest.

4. Too many options in the market makes you confusing

How do you choose between two insurance policies? What’s the right thing to invest in? Short term, or long term? What things do you need to look out for? No idea? You get my point..

5. You should be independent after retirement

Most people don’t do retirement planning at a young age, but people who understand the power of compounding save a small amount towards their retirement. Retirement planning will allow to live with dignity in your retired life without being a burden on your family.

6. You have the right to be rich.

This could be the only reason why financial literacy is important. With the wisdom of right investment, patience, and knowledge of the power of compounding, it is easier to become rich. Most people work for money their entire life, whereas wise people make money work for them. Check out the books I shared below which will help you.

I will list some of the great resources I used to improve my Financial Literacy. Check them out. 
 
 
1. Rich Dad Poor Dad
 This amazing book which was an eye opener. You should start with this book. It basically emphasises that you should learn to make money work for you rather than you working for money.

2. How to be your own Financial Planner in 10 Steps
 This book is written with Indian people in mind. It gives you an idea about how to structure your savings and investments. It gives a clear idea about how insurance products work, and which one you should choose.

3. Investopedia.com
 When I started to come learn about Financial stuff, there were a lot of technical jargon, and investopedia has good explanations for them.

There are some good developments happening in our country for bringing integrating financial literacy with the education system. Read this article about Raghuram Rajan proposing for inclusion of financial literacy in school syllabus.

For more interesting articles on the topic, checkout the articles at http://www.richdad.com/resources/articles