| What Is Financial Literacy: Overview, Meaning, Definition, Fundamental Pillers Of Financial Literacy, Importance Of Financial Literacy, Benefit Of Financial Literacy, Financial Literacy Example, Summary |
What is financial literacy and why it is important?
I think everyone should ask this question themselves and try to find the answer to this question themselves.
But if you do not get the right answer read the complete article I’m sure you will really get an idea of financial literacy and will want to be financially literate.
From childhood to teenager, after 18 years of formal school education, our ultimate goal is to do a job and earn money to run the family.
But I wonder, we never teach about financial literacy in 18 years of formal school education.
Finally, after school, we do a job and earn money to run the family and we don’t know how to manage money because we are never taught about financial education and financial literacy in school.
Financial Literacy is not a choice of any country, It is the necessity of any country to have financially literate people and grow their life along with the country’s economy.
Some people are working on sharing the knowledge of financial literacy to improve other people’s lives and grow the economy, they deserve the reward and respect.
What is Financial Literacy : An Overview
Just as education gives understanding to a person, similarly financial literacy also helps a person to understand financial knowledge so that he can make the right financial decision for his future and never get caught in any financial trouble or from any financial trouble. easy to get out.
What is Financial Literacy: Meaning
The meaning of financial literacy is financial education, education of financial resources like budgeting, saving, debt and investing for a lifetime journey. Taking effective financial decisions for future prospects.
What is Financial Literacy : Definition
The ability to use knowledge and skills to manage financial resources like Budget, Debt, Saving, and Investment, effectively for a lifetime of financial well-being.
» Are you want to learn more? To read about the top 8 industry Financial Literacy Definition
Four Fundamental Pillers Of Financial Literacy
Now, Here we discuss four fundamental pillars which help to make you financially literate from the world-famous book ” Rich Dad Poor Dad ” written by Robert T Kiyosaki.
- Understanding of Asset and Liability
- Understanding of Cash Flow and Capital Gains
- Understanding of Debt and Taxes
- Understanding of Self Financial and Investment Decisions
Understanding of Asset and Liability
Asset refers to capital and it makes you rich but now the question is when everyone purchases assets in their whole life and no one will ever want to buy liability then why are most people in this world poor?
The actual reason is people buy assets but it is a liability, now you are curious how can this be possible.
So let a look at, the common man’s definition of an asset ” Every valuable thing which you can sell is an asset. ” and asset examples are plots, houses, bikes, cars, Mobiles, Stocks, Gold, furniture and mutual fund etc.
On the other hand, Robert T Kiyosaki gives a very simple and clear definition of Asset is “ Asset puts money in the pocket. “ and ” Liability takes money out of the pocket. ”
So now everything is crystal clear, the reason behind suffering people in poverty. Because they knowingly or unknowingly kept buying liabilities as assets throughout their lives.
People think of their house as an asset when in reality they are a liability because it does not put money in your pocket but keeps money out of your pocket in the form of maintenance
Understanding of Cash Flow and Capital Gains
Cash flow
Cash flow means what comes in as an income in your pocket and what goes out as expenses from your pocket like in a regular interval of 1 day, 1 week, or 1 month etc.
Rich people understand the game and power of the cash flow as they create a system to get cash flow like a money pipeline and using this pipeline they generate cash flow rapidly at regular intervals.
on the other hand, middle-class people never understand the power of cash flow and always spend their life in poverty
Capital Gains
Capital gains mean buying something at a low price and selling at a high price, the profit amount after selling is called capital gains.
Financially intelligent people work and invest for cash flow and the common man works and invests for capital gain.
The common man’s money either gets exhausted or gets trapped by getting caught in the trap of capital gain, he is unable to use his money properly and remains poor.
Understanding of Debt and Taxes
Debt means unpaid loans, advances or credits etc.
Common men always think debt is bad why is this the reason every financial advisor said don’t take a loan and if you have any repay it first?
Despite this, the common man is caught in the debt trap, he is not able to earn enough from the salary that he can run his house in case of emergency, sometimes for illness and sometimes he has to take a loan to build a house.
But rich men are well-known debt are two types one is Good Debt and the other is Bad Debt. Good Debt is those which makes you rich and financially independent.
On the other hand, Bad Debt is those which makes you poor and financially broke.
The same debt may be good debt or bad debt according to how you use it. If you get profit to take and use a debt it is good debt and if you get lost your money, it is bad debt.
The Same Loan may be good debt or bad debt, bad debt is paid from salary income and good debt generate income.
Example:- Buy a Car
Scenario 1 – Bad Debt
If you buy a car for personal use then you have to pay for fuel, maintenance and EMI from your salary with the car value depreciating every year so it is bad debt.
Scenario 2 – Good Debt
If you buy a car and let it out on rent, due to which you get some monthly money in your pocket along with oil, EMI and maintenance from car rental, it is good debt.
Understanding of Self Financial and Investment Decisions
This is why you need to financially educate yourself so you can take your best financial decision for yourself. Because if you take suggestions from others then –
Scenario 1 – Your stockbroker will advise you to buy the same stock which will benefit your stockbroker first and yours later.
Scenario 2- Any insurance agent will buy or advise you to buy the same policy from which he gets the maximum commission.
Scenario 3- Your house broker will advise you to buy the same house from which he will get a maximum commission.
To understand the power of self-finance and investment, you can make the best financial decision for your future, So listen everyone does yours.
Importance Of Financial Literacy
The importance of financial literacy is so much as budgeting, saving, debt management, investing along with taking effective financial decisions for future financial well-being.
» Curious? Learn more about the importance of financial literacy
Benefit Of Financial Literacy
There are lots of benefit of a financially literate person some are as follow.
- Always have an emergency fund, health insurance and term life insurance.
- Saving for the future.
- Create a budget and stick to it.
- Make retirement planning.
- Make a financial goal and work for it.
- Invest for a better financial future.
- Start investing as soon as your career starts.
- Know the power of compounding.
- Understanding of financial products.
- Ability to make better financial decisions always.
- Use the leverage as good debt.
- Less financial stress and anxiety.
- Effective management of money.
What is Financial Literacy Example
Here is some example of financial literacy. Let’s assume Ram and Shyam are friends, they start their careers with the same designation and salary in the same company and Ram is financially literate and Shyam is not. After 10 years both save $50 Lakh.
Scenario 1 – Ram is a financially literate person.
Ram has term life insurance, and health policy and invests in a retirement plan 401k as the first month he got the salary and also invests in stocks and mutual funds.
Scenario 2 – Shayam is a financially illiterate person.
Shyam has no term life insurance, no health policy and has never invested in stocks and mutual funds.
Now, if Shayam’s wife is ill then Shayam pay the hospital bills from his saving and exhausts all his saving to cure the disease of his wife.
In the case of Ram, Ram will pay hospital bills from the health policy. thus, It is clear what is financial literacy.
Summary
All the above fundamental factors describe what is financial literacy and if you do the same thing that others do then you will get the same thing that others get.
So real financial education motivates you to make your own way and do something different to be financially independent.
FAQ
Q : How Do I Become Financially Literate?
Q : Why Is Financial Literacy Important?
Q : What is the meaning of financial literacy?
Q : What are the 4 main components of financial literacy?
1. Understanding of Assets and liability.
2. Understanding of Cash Flow and Capital Gains.
3. Understanding of Debt and Taxes.
4. Understanding of Self Finance and investment decisions.
You can read what is financial literacy from the world’s top financial educator websites Link is below…
