Financial Literacy: Why Is It Important To Become Financially Strong and Independent?

Want to obtain a panacea? The answer is quite simple: Be financially literate

To many people, the word “Financial Literacy” could be a jargon understood only by finance professionals, however, it certainly is not the case. Financial literacy is about earning your financial freedom and independence for all. This concept helps you to generate the financial sources (e.g. money), efficiently manage and utilize it and thus achieve your various financial and non-financial objectives.

Every individual, on the journey to life (usually daily), has been connected to the term financial literacy, though their comprehension may be different. A clerk earns his wages and divides them into the expenditure headings. Professionals may allocate the earnings to investments. The activities of both the clerks and professionals fall under the ambit of financial literacy. However, the understanding and disciplined implementation of the terminology may determine the financial freedom and soundness of these two individuals. The clerk may achieve his financial goals and freedom if he aptly utilizes his limited wages while professionals may go bankrupt if they misallocate the resources.

To lead a financially healthy lifestyle, one must be financially literate from an early stage and be practical with it in daily life. As a matter of fact, the individual successes are gauged on their financial independence and status. Happiness is largely possible with financial freedom. Thus, financial literacy is a must for all and actually should be the right of every individual. People may find ways to earn their means of living i.e. money but most likely be ignorant of how to manage it and face the wrath of financial ruin. The moment they obtain insight into money management is the moment they become enlightened by financial literacy.

Everyone particularly teenagers nowadays dream of financial freedom and success. But, very few have actually worked on such aspiration. Everyone should take the saying “Start Early”; though very common; seriously. Teaching your children about knowledge on financial management from an early age is how you can help them achieve the freedom and independence, they so strongly desire, no matter which field of study they would like to go to. The early they understand the value of monies, the better they will prosper in their life. Financial literacy is more reflected by the behavioral aspects of the individuals than the theoretical understandings.   

Learning about finance encompasses managing assets and liabilities as well. While assets provide you with economic benefits, liabilities tend to drain your economic status. So, maxing out on credit cards and having loans to repay, while you are moving from paycheck to paycheck can lead to financial stress and anxiety. Even though having these loans and credit cards makes it possible for you to afford many things in life, you need to know what you are using the money for. You observe the real estate market in the city thriving and estimate the momentum to continue, what financial smartness will you take on? Most likely, you will take a mortgage loan at a 60% LTV ratio, and buy a house earning a handsome rental income. You will amortize the bank's borrowings through the rental income and/or your earnings sources. You find the value of your house, i.e. your assets appreciating while your liabilities to banks depreciating. On the other hand, your estimate turns out false and the housing market starts depleting. This will result in your liabilities exceeding your assets, resulting in you being insolvent. The wisdom of financial literacy will help you manage your assets and liabilities at best, thus affording you and your family happiness.   

Many of us are working hard throughout life to earn money, but have no idea whatsoever how short of it we are in the end. This is why you need to keep track of where your money is going and whether these expenses are really worth making. Keeping your expenditure in check by creating a detailed budget plan, and accounting for your income, expenditure, savings, debt, and insurance helps develop a financial plan for yourself for a short to a longer period of time. With this knowledge, you will be able to devise an investment plan for yourself after making the necessary expenditures. Knowing beforehand, how much you can afford to invest is another way of making a smart financial decision.

There is something you need to know about investment as well. We are all familiar with the proverb “Don’t put all your money in one basket; diversify”. This means the product you are investing in could be risky and if you put all your money into it, you might never see that money again and this, in turn, worsens your financial situation. Hence, you need to know about your investment risk capability and diversify your investment accordingly. Firm knowledge of the risk analysis helps you make a better-informed financial decision. Some may afford to take higher risks because they have abundant resources (eg. financial) and limited obligations, while most settle with limited resources which limits their risk capacity. Thus, the suitability of investment products may differ from individual. The knowledge of portfolio management can positively augment one's financial situation.

To recapitulate, financial literacy enables you to make smart decisions on scarce financial resources on a daily basis. This helps you to set your and your family’s financial goals, plan your retirements, efficiently budget your expenses and efficiently utilize the remainders. This gives you and your family financial freedom and independence. When every household achieves such independence, the nation shall then be financially strong and independent. Therefore, financial literacy is a must discipline and a fundamental right of every individual, it is a cure-all for all of us.   

-Sukriti Khanal

ACCA Member