What is Financial Literacy?

What is Financial Literacy

Financial Literacy, is the rationalizing of financial components such as budgeting, investing, borrowing, taxation, and personal financial management. The absence of such components or skills is referred to as being financially illiterate. Many nations especially developing countries like India, lack financial literacy.

Let’s us all understand the components of Financial Literacy.

Financial literacy consists of several components that allow an individual to gain knowledge regarding financial management and debt.

Components of Financial Literacy

Below are the fundamental components of financial literacy that one should learn.

1. Budgeting

Budgeting your finance is the key to being financially literate. In budgeting, there are four main uses for money that determine one budget: spending, investing, saving, and giving away in the right proportion.

Creating the right balance throughout the usage of money allows individuals to better allocate their income, resulting in more security and savings.

In general, a budget should be made in a way that helps you pay off all the existing debts while leaving money aside for saving and beneficial investments.

2. Investing

To become financially literate, one must learn about the key component of finance regarding investing. Such investments allow individuals to make smarter financial decisions that may result in an increased inflow of income.

3. Borrowing

In most cases, every individual borrows money at one point in life. To ensure borrowing is done effectively, an understanding of interest rates, compound interest, tenure of the payments, etc, is necessary.

If the criteria above are understood sufficiently, an individual’s financial literacy will increase, which will provide practical borrowing guidelines and reduce long-term financial stress.

4. Taxation

Gaining knowledge about various forms of taxation and how they impact your financial status is significant to understand for obtaining financial literacy. Whether it be employment, investment, rental, inheritance, or unexpected, each source of income is taxed differently.

Awareness of various income tax rates allow an individual to be economically stable and increase their financial performance.

5. Personal Financial Management

The most important criteria, personal financial management, includes entire components to financial literacy. Financial security is ensured by balancing the mix of financial components above to solidify and increase investments and savings while reducing borrowing and debt.

Achieving an in-depth knowledge of the financial components discussed above guarantees an increase in an individual’s financial literacy.

Benefits of Financial Literacy

Being financially literate is a skill that brings forth an assortment of benefits that can improve the standards of living through an increase in financial stability.

Below are the benefits of financial literacy:

• Better financial decisions
• Better management of money and debts
• Equipped to reach financial goals
• Better vision of expense
• Less stress and anxiety
• Increase in ethical decision- making.
• Effective creation of a structured budget

Making steps to becoming financially literate is an important component of life, and with Single Debt and their management plan will ensure financial solidity, reduce anxiety, stress, and stimulate the achievement of financial goals.

Disclaimer

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. City Credit Management LLP is not liable for any decision arising out of the use of this information.