'I think if people truly understand the way that financial systems work at an early age, or even later on in life-if they've made poor decisions but learn how they can go back and fix them and start planning for the future-they can then encompass that and take the steps to make a better life for themselves.' - Cherry Dale, Director of Financial Education, Virginia Credit Union
Finance, if defined in simple words, is the management of money. It consists of activities like investing, saving, lending, borrowing, budgeting, and forecasting. Financial literacy refers to the confluence of financial, debt, and credit management knowledge. This knowledge is necessary to make responsible decisions related to one's finances as these choices are integral to our everyday lives.
Financial literacy can be defined as the ability to manage your money. Financial literacy guides a person about how to make major financial decisions. The main advantages of gaining financial literacy at a young age include an increase in financial discipline and financial capability which can lead to a major lifestyle change like saving and investing regularly, managing debts effectively and fulfilling life goals efficiently. Additionally, financial literacy helps ensure financial well being and protects individuals from financial frauds.
The absence of financial literacy can affect people in both developed economies as well as those who live in developing or underdeveloped countries. Consumers in advanced economies also display a lack of knowledge about financial principles that can help them understand and negotiate the financial landscape, manage financial risks effectively, and avoid financial pitfalls. Nations globally, from Korea to Australia to Germany, are faced with populations that do not understand financial basics (Klapper, Lusardi & Oudheusden, 2015).
So why exactly is financial literacy important for young adults?
1. Aids Smart Decision-Making
Financial literacy helps in prudent decision-making, which assists individuals achieve their life goals without falling into financial pitfalls, such as a heavy debt.
It can help support short-term as well as long term- goals. Consider you want to take up a course at your university that is a bit expensive for your budget. So by creating and sticking to a weekly budget that helps you save extra money into a savings account, you may be able to save enough funds to take up that course without missing any expenses, over drafting a credit card or racking up credit card expenses. This can be considered a short-term goal.
In case of long term goals, for example, suppose you are pursuing your undergraduate degree and want to apply to a foreign university for post graduation.. If you have a basic knowledge of the financial tools and resources available, then you might be able to save funds in a savings account for your future education without laying a huge burden on your parents.
2. Helps develop a feeling of Empowerment
The confidence that an individual has an understanding of how to manage their finances makes young people more positive about the future. Knowledge and information breed power and hope. Youth financial education provides young people with the knowledge and skills that lets them manage their money and credit wisely. The more information young adults have about their finances, the better-equipped they will be. Education about money should be given the same priority as other disciplines are given in a school curriculum. This will help them gain confidence in their ability to create an economically secure future.
3. Helps prepare better for emergencies
For a young adult who has financial literacy, it becomes a little easier to maneuver whenever they are faced with an emergency that requires a major financial expense. They are better able to equip and come out of the situation as compared to someone who does not have financial knowledge. In other words, there are a number of reasons as to why financial literacy is important for our youth. The failure of not being financially literate and independent with zero or less information about how to save, invest, budget and manage debts can lead to a generation that's not only irresponsible but also poor.
Having money in savings to use for emergencies can keep any person out of financial trouble. It's easy to put your fund in a standard savings account, but this earns almost no interest. Put your fund in a high-interest online savings account, short-term certificate of deposit (CD), or money market account.
Financial literacy is one of the most essential life skills one needs to have as it increases your financial capability. Planning finances, managing budgets and savings should be included in the school curriculum. However, it's never too late to to start with it. Any improvement in financial literacy will have a profound impact on consumers and their ability to provide for their future. Recent trends are making it all the more imperative that consumers understand basic finances because they are being asked to shoulder more of the burden of investment decisions in their retirement accounts, all while having to decipher more-complex financial products and options. Becoming financially literate is not easy, but once mastered, it can ease life's burdens tremendously.