Have you ever noticed the tendency to perceive events as isolated incidents that are seemingly unrelated to the broader context? The digital and finance worlds are a good example of this phenomenon. For one, the internet and social media have only evolved over the past three decades, while finance stands as an ancient institution. It is also a sphere where many individuals believe their involvement is limited.
In many cases, people fail to recognise the link between their personal circumstances and the financial landscape. While they might secure loans for homes or vehicles and utilise credit cards for leisure or indulgences, these actions are often seen as the sum total of their financial interaction.
This perspective highlights the pressing necessity for financial literacy education. Let’s be honest, inadequate financial management, coupled with an unclear relationship with money, can lead to economic instability and all kinds of stress.
Today, with the integration of cyberspace, especially among young adults, understanding the following aspects of finance has become crucial.
- What constitutes financial literacy and why it's pivotal
- How financial choices impact personal and societal well-being
- Navigating the digital realm's financial intricacies
- Creating a resilient financial future in a technology-driven world.
In essence, understanding financial literacy means that we can make informed decisions using the digital landscape for:
- Banking and finance
- Building financial savvy
- Managing investments for a secure financial future
- Starting a business.
Global surveys among university students have unveiled a widespread desire for practical knowledge in budgeting and money management. A significant number of young adults are grappling with the harsh repercussions of financial missteps. Despite being technologically savvy, they often lack comprehension of financial intricacies.
At the core, the definition of financial literacy entails equipping oneself with the knowledge and skills necessary to make informed financial decisions. This encompasses understanding concepts such as budgeting, saving, investing, and debt management. The symbiotic relationship between financial literacy and technology emerges as a vital tool for young adults to navigate the complexities of the modern financial landscape.
The Future of Finance and Banking
Over a significant span, banks have held substantial control over money. During the Middle Ages, the Medici family pioneered private banking to bypass religious and royal restrictions. The inception of the first public bank in Genoa, Italy extended this practice, giving these entities dominance in both finances and clients' data.
This prolonged supremacy made the banking sector appear immune to regulations; consumers accepted prevailing banking norms without challenge them until the 2008 global economic crisis disrupted everything.
In its aftermath, governments, industries, and individuals struggled to restore financial stability. Meanwhile, an enigmatic entity introduced the rise of blockchain technology and the birth of Bitcoin which heralded a new financial era.
Amid these changes, the question can be asked: why is financial literacy important?
Keep reading for more information on what financial literacy is and why is it important.
Why Financial Literacy is Important for Young Adults
If you’re someone comfortable with technology, the impulse to explore the realms of open banking and blockchain might be strong. While you're welcome to venture down that path, you'd glean more insight by understanding the overall possibilities of fintech.
This isn't a reflection on your financial expertise, but rather a recognition that a spurt of information can sometimes lead us astray. Think about those instances when tech-savvy investors went all-in on cryptocurrencies only to face substantial losses. Instead, ask what is financial literacy and then find out why financial literacy is important.
So, What is Financial Literacy?
Financial literacy means possessing the skills and knowledge needed to make well-informed decisions concerning one’s financial assets. This necessitates a clear understanding of one's financial resources.
But what is the relationship between budgeting and financial literacy?
Budgeting: Why is it Important?
Budgeting, which entails comprehending your income and expenses, is the foundational step towards financial literacy.
Once you've discerned where your finances are allocated, or rather, charted how you intend to allocate them, it's time to establish goals. These financial objectives could encompass property acquisition, starting a family, or funding an education. Setting financial goals marks the second phase of financial literacy, with the immediate creation of an emergency fund being a critical component.
Having devised a budget and accumulated six months' worth of living expenses in savings, you're poised to pursue other financial aspirations. Amongst these, wealth growth should take precedence and is a pursuit typically achieved through investments.
To help you understand why financial literacy matters, the next section delves deeper into investment motives that could align with your overall financial ambitions.
In addition, the question of why financial literacy is important for retirement is also crucial.
While retirement might be the furthest thought from your mind during the prime of life, it's precisely during this period that planning for it should commence.
Why is Financial Literacy Important for Investment
Investing isn't solely about ensuring a secure retirement. Even for young individuals, it holds numerous advantages. Don’t make the mistake of overlooking the benefits of investing early so that you can reap the benefits. A common mistake made by many is to underestimate the time required for money to work in their favour. Fortunately, if you are a young investor, you have the invaluable asset of time in your favour, and it is never too early to start.
Saving Versus Investment
Opting for investment over mere saving offers substantial benefits, especially with the advent of fintech. Investment platforms may involve fees, but if you consider what you are saving on broker fees it can be more effective. In addition, by taking the reins of your financial future it allows personalised decisions regarding investments.
Investing has the added advantage of compounded earnings. Imagine receiving a substantial return from a well-performing share. Rather than cashing out, reinvesting the gains leads to compounded growth. This approach enhances your financial standing without straining your budget.
Saving serves as a basic financial strategy for the short term because the minimal lending rates by banks make the returns less substantial. For short-term goals, like holidays or minor purchases, there is certainly relevance in saving to reduce the reliance on credit. On the other hand, incorporating investments for long-term saving is pivotal.
In essence, recognising the benefits of investing early and understanding the importance of starting as young as possible is the way to lay a robust financial foundation. Embracing fintech-backed investment options opens doors to cost-effective and personalised financial growth, while the compounding effect ensures gradual wealth accumulation. Rather than limiting oneself to short-term saving, integrating long-term investment strategies will help to build a secure future.
Financial Literacy for Entrepreneurs
Lockdowns during the pandemic triggered a surge in online entrepreneurship, with individuals establishing podcasts, YouTube channels, and finding success as TikTok or Instagram influencers. This pursuit, whether prompted by circumstances or intention, propelled them into the realm of business.
While many dream of self-employment, the stringent regulations, intense competition, and high failure rate of new ventures are big deterrents. Instead, regular 9-5 work and a salary are more appealing, especially when there are family responsibilities and debt repayment to consider.
Sadly, limited startup capital hinders many from pursuing business aspirations, although government grants or loans might provide aid. Financially literate entrepreneurs recognise that launching a business burdened by debt diminishes its likelihood of success. They prioritise business initiation as a financial goal that meticulously accounts for startup costs and sustains their livelihood until profits result. This type of budgeting approach is one way to look at the definition of financial literacy.
Successful businesses also prioritise viability. Today, amid influencers and podcasters, proper market research and feasibility studies are often neglected. Yet, taking a hit-or-miss approach from a financial standpoint is discouraged. The message here is that with a sound business plan, starting a business on a tight budget is possible.
For instance, having a skill is a good place to start. For those skilled in playing the guitar or yoga instruction, becoming an independent tutor, who offers music or yoga lessons online is a good option. Most of the time, minimal investment is required and all that is required is knowledge and a good level of tech-savviness. Using video chat applications, online resources, and free social media advertising can also enhance one’s tutoring business without jeopardising current income.
So, why is financial literacy important?
So that you can live better and plan better whether that is with your salary or new business venture.
*Disclaimer: The content of this article is intended for information purposes only, and should not be considered or used as financial advice.
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