In coming of age in an economy where there is much uncertainty on the security of your main source of income, having financial literacy is of utmost importance. The pandemic has taught us lessons about the lack of preparedness for unexpected distress of not having enough money saved for contingencies.
Yet what is financial literacy and how can it help us prepare for the unexpected?
Financial Literacy Defined
Financial literacy is that state of mind where a person is knowledgeable about basic financial matters in ways that will enable him or her to effectively manage financial resources. In being financially literate, you will be able to understand and develop basic skills in budgeting, in keeping your cash position illiquid, in negotiating for the best deals, as well as in choosing the right investment product on which to grow your money.
The more financially literate you are, the better equipped you become in saving up for the future and whatever that future brings.
Studies Revealed Low Levels of Financial Literacy Among American Millennials and Gen Zs
A study conducted by the National Endowment for Financial Education revealed that only 24 percent of American millennials indicated basic financial literacy. The Teachers Insurance and Annuity Association of America (TIAA) fielded a 2020 survey that revealed the members of Generation Z as the demographic with the lowest level of financial literacy; as only 41% were able to answer the index questions accurately.
Such revelations were supported by the results of a study performed by the Urban Institute, which revealed that as many as 77 million Americans in all demographics have outstanding credit card debts. A separate study by the Financial Industry Regulatory Authority (FINRA) indicated that one-third of American with credit card debts pay only the minimum amount due on their credit card bill/s each month.
Importance of Being Financially Literate
According to financial expert and founder of Edelmar Financial Engine, persons who are not financially literate tend to pay for purchases that could have cost them less and at the same time tend to miss out on investment opportunities. The most common case examples provided by financial experts in relation to lack of financial literacy is the practice of using credit cards for nearly all purchases, without understanding the impact of compounded interests.
Why Financial Literacy Matters in the Use of Credit Cards
While the main benefit of credit cards is in having the power to defer payment on purchases, one should have full understanding of the Annual Percentage Rate (APR) of interest being applied by credit card companies on outstanding debts.Since this article mainly focuses on the importance of financial literacy, we will not go into long discussions about APR.
We will simply point out that the interest increases the amount of your obligation on a daily basis and has a compounding effect. When an interest becomes part of your outstanding balance, the minimum payments you make monthly will first apply as payment of the interest due. In the meantime, the unpaid balance of your credit purchase remains outstanding and still subject to monthly interest charges. As a result, your credit score will be affected because your credit card history will reflect slowness in the payment of obligations when they fall due.
Financial literacy is more than just looking for the best offers, let’s say for a car insurance coverage. Even if websites like carinsurancenearme.com furnish the most comprehensive data with which to make comparisons, being financially literate will enable you to analyze which insurance policy can effectively provide you the best coverage for car-related contingencies.