Managing your finances more efficiently is one of the important goals you may want to work on this year. In our previous article, “What Is Financial Health and How to Improve It”, we have discussed the term “personal financial health” and the ways to reach it. In this material, we are taking a broader look at finances and financial literacy, which is an essential concept that requires attention.
What is financial literacy?
The term “financial literacy” generally describes one’s possession of money management skills like budgeting and investing, as well as knowledge and understanding of important financial processes.
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This is especially important for those who are interested in trading and investing, since these are risky forms of money management. Traders need to possess a high level of financial competency in order to make well-informed, rational decisions.
Key steps to better financial literacy
Financial education requires knowledge of financial principles and concepts such as financial planning, interest rates, debt management, effective investment strategies and the time value of money.
The key steps to improve financial literacy are:
- Learning and practicing how to budget
- Monitoring spendings
- Learning debt repayment strategies
- Planning for retirement
These steps may also include consulting financial experts, if necessary. Financial literacy is about understanding how money works, developing and achieving financial goals, and solving internal and external financial problems.
But what does it ultimately mean to be financially literate? It means being able to answer important questions when faced with financial decisions on a daily basis:
- Is this investment/purchase a good decision? Is it risky?
- What consequences will I bear in the short-term and the long-term perspectives?
- What are the benefits of this decision?
- What are the downsides of this decision?
- Does this investment/purchase go along with my financial goals?
Financial literacy doesn’t mean that you know absolutely everything about money, but it implies that you understand such basic concepts like budgeting, credit, investing and money management.
Why financial literacy is so important
Levels of financial literacy may vary according to education and income, but there is evidence that highly educated, high-income consumers can be as financially illiterate as low-educated, low-income consumers. Moreover, consumers admit that financial decision-making and education is a challenge and a concern for them. However, financial basics are important to grasp regardless of your financial status or income.
Financial literacy shows how an adult makes their financial decisions. It helps a person create a financial plan that defines their income, expenses and debt. This may help them manage these factors and save enough to have sufficient retirement income while avoiding high levels of debt that can lead to bankruptcy.
Financial ignorance can lead to poor financial decisions that can have a negative impact on a person’s financial well-being.
Conclusion
Acquiring financial knowledge and skills has a huge impact on the quality of your relationship with money. The higher your financial competency, the more opportunities you have to handle financial procedures in the most proficient way, which improves the quality of life tremendously. Though it may not always be easy, becoming more financially literate is important for everyone, and especially for those interested in trading. Adding better financial literacy as one of your goals may be a good idea and may positively enhance your trading approach.
