Language forms the basis of all our communications, and it is the foundation of understanding complex social, structural, and emotional topics. Without communication, we wouldn’t be able to relate to one another or express our ideas. Becoming fluent in any language is vital in order to connect with others, and language gives us power over our reality. If we want to become fluent in a language or culture, we must immerse ourselves in it and truly understand it. Without that, we are lost.
Financial literacy may sound like some kind of wonky, out-of-date language used by accountants, but in truth, it forms the foundation of our understanding of money. It forms the backbone of how the financial world works, how it speaks, and even how it moves, and this literacy is a vital skill to develop as an individual. Becoming financially literate creates savvy savers, investors, and money managers and allows you to take control of your financial life in a powerful way.How Financial Literacy Creates Savvy Savers
Financial literacy gives you the tools to understand the critical tenets of how money works. Over time we have moved from a society that deals mostly in physical cash to one that largely depends on credit and contactless payments, transfers, and investments. Because the way we interact with money has become largely intangible in the real world, the concepts that govern money can be difficult to understand and grasp. That’s where financial literacy comes in.
Financial literacy is simply a fancy way of saying that you understand your finances. It means reading the fine print and knowing what you are signing before you sign it and agree to it. It means having a grip on your weekly, monthly, and yearly outlays, and it means living within your means. It encompasses a wide array of topics: everything from how to buy a home to how to apply for a car loan. And understanding finances means getting a grasp on your financial well-being.
Financial literacy creates savvy savers because it helps people understand the mechanisms by which they can save more money. Whether it’s understanding how interest compounds or how the market affects your 401(k), having a clear comprehension of financial details empowers you to make more sound financial decisions.
Additionally, as the world continues to move to online banking and investing, banks are taking the opportunity to extend more and more credit offers to more people. The options often sound too good to be true, and if you take the time to educate yourself and read the fine print, you will likely find that they are, in fact, too good to be true. Knowing your rights, understanding your responsibilities, and being able to meet your obligations are all part of the financial literacy equation, and they help you make better, more well-informed savings decisions for you and your family.
In order to become a savvy saver, you need to understand that money woes today can and will likely impact you for many, many years to come. Understanding that borrowing money today at a high interest rate is essentially spending future earnings is a fundamental idea to grasp. For example, if you borrow $5,000 today at 3% interest for five years, that borrowed $5,000 could cost you a total of $5,750. That’s $750 you’ll have to spend in interest to borrow that $5,000, and those kinds of numbers can add up quickly.
An additional and important point to note: Not paying one bill today doesn’t just affect that bill as it currently sits, but it can also impact your credit score and your ability to get more credit in the future—and even your chances of getting a job. It’s vital to consider this before you borrow any amount of money or let any bill sit beyond its due date.How Financial Literacy Creates Savvy Investors
If investing seems like some kind of magic trick to you, you are not alone. Investing any amount of money can seem like some kind of ungraspable, for-the-elite-only activity. But in truth, investing is for everybody, and it can do a world of good for you and your family both today and in the future. Here’s what you need to know.
Investments, in general, tend to appreciate or go up in value over time. While each investment (stocks, bonds, mutual funds, real estate, precious metals, etc.) is different and has different properties that you need to understand before investing, in general, good investments increase in value over time. There are many subtleties to various types of investments, but, for example, gold has always been valued as a “safe” investment because it provides what Investopedia calls “a durable hedge” against inflation. In normal-speak, that means gold holds its value better over shorter periods of time than, say, the stock market does.
Of course, this depends on what time period you are specifically talking about. For example, as Investopedia notes, “When evaluating the performance of gold as an investment over the long term, it really depends on the time period being analyzed. For example, over a 30-year period, stocks and bonds have outperformed gold, and over a 15-year period, gold has outperformed stocks and bonds.”
Understanding the “time value of money,” or the idea that money you have now is worth more than the same amount in the future (thanks in large part to various properties of the market and the way that interest works), is crucial when it comes to understanding investing. Think of it this way: If you were offered $10,000 today or $10,000 in two years, which would you choose? The smart investor would choose $10,000 today because they could then possibly put that money into a savings account that could earn them interest, or they could invest the money in the market and make even more money. A bird in the hand today is better than a bird promised in the future.
While investing isn’t necessarily simple, there are plenty of resources out there to hone your financial literacy skills when it comes to investing. A good primer is over at Investopedia.How Financial Literacy Creates Savvy Money Managers
The term “money manager” generally refers to professionals with specific licenses who manage portfolios of investments for clients. They are tasked with maximizing their clients’ investments in ways that help them achieve their goals quickly, safely, and responsibly. In this case, however, I am using the term “money managers” in a less formal sense: Each one of us is our own money manager in that we are wholly responsible for our own financial well-being. Here’s how getting financially literate can help you become your own best money manager.
For one, getting financially literate can help you increase your earning potential well into the future. If you know and understand what is going on in the market and the economy as a whole, you can take that knowledge and use it to make better investment and savings decisions that could set you up for a great future.
Second, getting financially literate can increase your return on investment. The money that you stash in your 401(k) can become a source of security in the future, and the savvier you are at managing your money in that 401(k), the more likely you are to increase your return on investment.
Third, financial literacy helps provide peace of mind around all your money management decisions. Knowledge is power. If you grew up in the 1980s, you probably remember those old public service announcements that always ended with the slogan “The More You Know,” and that slogan certainly applies to your money management skills. The more you know about how the market works; how investments work; and where your money goes on a daily, weekly, monthly, and yearly basis, the more power you have to make decisions and choices that help support your life goals. The more you stay up on current trends, what is happening in the world, what the markets are doing, and what business is doing, the more you can maximize your income and investments. It just makes good sense to become your own best advocate when it comes to managing your money, and the first step is to educate yourself.The Bottom Line on Getting Financially Literate
Financial literacy may seem like a boring topic or one that is just far too complex to understand, but getting financially literate will help make your life better. It will make you feel more secure when it comes to making all kinds of financial decisions (both large and small), and it will help you build a secure future for your family. While there’s always more to learn, it pays to start small and start slow. Ask questions, rely on verified sources of information (if you want to know more about getting good information about financial literacy, read this story by For Dummies), and ask the experts. Becoming financially literate may seem like a huge task, but by getting smart about your money, you can become a savvy saver, investor, and money manager.