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Financial Literacy

By: EconomyWatch Date: 30 June 2010

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Financial literacy refers to the knowledge required for managing personal finance. It does not refer to formal education in finance. Instead it encompasses an understanding of how to use credit responsibly, manage money, minimize financial risks and derive long-term benefits of savings.

Importance of Financial Literacy

Consumerism has spiraled. When a person thinks about transportation, he thinks about owning a Lexus. Moreover, a large percentage of people use credit to improve their lifestyles, spending significantly beyond their means. The easy availability of credit has fueled this phenomenon. The distinction between needs and wants has become hazy. These tendencies lead to substantial debt. Once a person is in the hole, it is extremely challenging to climb out of it.

The number of foreclosures in California quadrupled in 2008, according to the state government report. In fiscal 2008, approximately 1.2 million people filed for bankruptcy in the US, according to Federal Court records. These statistics highlight the importance of financial literacy.

How Financial Literacy Helps

Financial literacy can prevent a person from falling into a financial hole as well as act as the ladder to climb out of it.Financial wellbeing can not be achieved via ad hoc endeavors. Rather it is built on the foundation of saving early and saving often. Financial wellbeing is reached through setting financial goals and moving towards them in a consistent and disciplined manner. One does not have to be rich to achieve financial stability. Financial literacy and planning is all that isneeded.

The need for financial literacy arises from the following:

The importance of safeguarding your money.

Planning for retirement.

To understand complex financial products, which may offer high rewards, but may be associated with high risks.

To invest wisely, so as to maximize earnings and minimize risk exposure.

In the words of Jamie B. Stewart, Jr., the first vice president of the Federal Reserve Bank of New York, “When you come down to it, the most fundamental reason why people should strive to become more financially literate is to help them to reach their personal financial goals. Whatever the specific goal, the payoff to financial literacy is an improved standard of living and a sense of confidence about the future.”