Finances

What is financial literacy (and why everyone should know about it)

Fundamental knowledge to conquer freedom and all your financial dreams. Understand what financial literacy is.

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Understand how financial literacy can help you take control of your finances

Understand what financial literacy is. Source: Adobe Stock.

In fact, when you were a child, you went to school to learn to read and write. So now that you’re an adult, you need to learn how to use your money. But what is financial literacy?

Keep reading to learn how this can change your life!

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In this article, we will explain what financial literacy is and how to get started in this field.

In addition, we have prepared a test for you to find out your level of financial literacy. So, stay with us and learn more about managing your own money.

What does financial literacy mean?

In fact, financial literacy is the basic knowledge about money management that everyone should have. A financially literate person knows how bank accounts and credit/debit cards work.

In addition, this person knows his earnings and debts and knows well how and how much he can save. So, with this skill, you can put together a realistic budget.

Someone financially literate can avoid high levels of debt and understand when it is advantageous to borrow.

In addition, you would be able to understand what credit card and loan rates are (APR and annuity, for example).

Therefore, you could compare two or more loans or cards and decide which one is best. Also, someone with this ability understands the importance of saving money, not just to have a good reserve fund.

But to prepare for retirement and to fund your kids’ college, for example. Also, you would know what a credit score is and what factors influence this indicator.

That way, you would know very well what the credit score is for, keep track of your own score and know how to improve it.

Finally, you would understand the basics of investments such as stock exchanges and bonds.

You would understand what assets are and how much risk you are willing to take at every moment of your life.

In short, someone who know what is financial literacy is someone who knows how money works and therefore can make the best out of their conditions (having little or a lot of money).

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Why is it important to be financially literate?

Understand what a little financial education can do for you, your family and your dreams. Source: Adobe Stock.

According to American Debt Statistics, 80% of people living in the US have some sort of accumulated debt. On a credit card alone, the average debt accrued is $5,500.

In addition, a large percentage of these people will not be able to pay off this debt by the end of the year. Also, among Americans, only 15% save some money for their retirement.

Additionally, 8 out of 10 Americans said their expenses are growing each year.

Furthermore, only half of the population invests any money. If we were financially literate, fewer people would experience problems like these.

Indeed, this ability would be critical to solving the financial problems you and your family face today and in the future.

If you end the month with no money to pay your card balance and you don’t understand where your money went, financial literacy can help you a lot.

If you don’t know where you’d get money from if your roof caved in, knowing what financial literacy is can help you prepare for the unexpected.

Also, you shouldn’t wait until you retire to find out that the pension paid to retirees will not cover your expenses.

Knowing a little about finances, you can prepare yourself from today for a much more peaceful retirement. This is a way of illustrating how this subject is so important in our lives.

How can financial literacy help you achieve your goals?

It doesn’t really matter if your goal is to compare homes or improve your credit score. So, all your goals that require some financial resources are more easily achieved with finance knowledge.

After all, most of our dreams depend on our ability to save and save. Think about your dream trip, the house you want to give to your family or the tranquility of having a balanced financial life.

In fact, this kind of goal requires you to be well organized with your finances and make good choices along the way. Not being able to save puts you further and further away from your goals.

Taking out a loan to pay off debt is also a setback. Likewise, accumulating debt on a high APR credit card also takes you further away from your goals.

In fact, knowing how to “avoid these pitfalls” is essential to achieving your goals.

Thus, it is possible to gather all the necessary knowledge to achieve your achievements by curing your “financial illiteracy”.

However, are you already financially literate? To find out, answer the quiz questions below:

How to find out if you are financially literate?

Students solving an exam in the classroom
Test time! Sit back and relax: it’s time to test your knowledge. Source: Flickr

By the way, do you already know what financial literacy is? Do you master the basics of personal finance? To measure your knowledge, we set up a short test with 10 questions.

You must answer each statement as true or false. Finally, check the correct answers to our test on the topic “test feedback” and, according to your correct answers, find out your level of financial illiteracy:

1 – Even with all the technological advances of banks, it is still safer to keep your money at home than in accounts.

2 – There is no difference between savings and checking accounts. Both are used for the same purpose.

3 – Emergency funds are a reserve of money that you must use in extreme cases. Therefore, you should allocate this amount to high-risk stocks on the stock exchange.

4 – When you use a credit card, it’s like asking a bank to pay a bill for you. At the end of the cycle, you must return this amount when paying the card balance.

5 – To improve your credit score, it is important that you do not use something around 30% of your credit limit monthly.

6 – APR is an interest rate charged on the unpaid amount of your balance. Typically, this rate tends to be higher for applicants with poor credit scores.

7 – No matter your situation, a credit card with a rewards program is always the best choice.

8 – Your credit score is an important indicator when you want to apply for a loan or for a credit card.

9 – Variations in the inflation rate do not affect the returns on shares on the stock exchange.

10 – To create an emergency fund, it is important to allocate your money to an option that offers high liquidity.

Test feedback

1 – False

2 – False

3 – False

4 – True

5 – True

6 – True

7 – False

8 – True

9 – False

10 – True

Now, know your financial literacy level according to your number of hits:

Hit numberLevel
0You have a hard time managing your money
From 1 to 3You are taking your first steps and already have some knowledge about personal finance
From 4 to 7You are no longer a beginner in the subject, but you still need to improve
From 8 to 10You already have a good understanding of basic market issues and money management. Who knows, it’s time to learn more about finance in more depth

Finally, this article was just a reason to research more on the subject. On this site, we have several contents that can help you.

One of them is just a click away. Check out our post below and get great advice on personal finance management!

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About the author  /  José Gonçalo

I started reading about finance only to find better options than savings. Since then, I have never stopped studying finance, and I believe that writing about it is the best way to help individuals feel fulfilled and have a healthy financial life. Today, I balance finance and medical school studies.

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