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What is financial literacy?

What is financial literacy?

Literacy is the ability to read and write. Financial literacy is awareness and knowledge of managing your finances. How to save money, options available to save money, investments, managing loans, insurance are all topics that everyone needs to know about. Unfortunately, most people, especially young people are not aware of these crucial topics. Youngsters especially are not concerned about managing their finances. They love spending money on latest clothes and technology. Once they start a family, they realize the important of saving for the future.

By then, they would have wasted many years where they could have saved quite a lot of money that would have been of use later. The main reason for this is lack of awareness. This is the reason why financial literacy is important. Being financial literate ensures that a person is aware of how to spend money wisely and how and where to save money for the future. Financial literacy can help a person make a clear roadmap for the future.

Financial literacy worldwide

The financial agency S&P conducted a global financial literacy survey worldwide. Respondents were asked questions related to basic concepts in finance. Based on the answers given, a ranking of countries was prepared in terms of financial literacy. As per the ranking[i], the top 5 financially literate countries are:

  1. Denmark – 71%
  2. Norway – 71%
  3. Sweden – 71%
  4. Canada – 68%
  5. Israel – 68%.

The USA had a literacy rate of 57%, the UK 67%, France 52%, Germany 66%, South Africa 42%, Russia 38%, China 28%, Australia 64%, Japan 43%, and New Zealand 61%. (Data from India was not available).

Need for literacy

Some of the common financial problems related to financial literacy that have been observed are:

  1. Increasing student debt for college study loans
  2. Obtaining multiple credit cards without a secure source of income
  3. Massive increase in credit card debt
  4. Savings rates not growing proportionally to growth in income
  5. Defaulting of loans by individuals

All the above are issues that could have been addressed through financial literacy. When people are aware of how credit cards work and the importance of being debt-free, they would probably work to reduce their debts. The need for saving money for retirement and the prospects of inflation affecting savings is something important that everyone needs to know about. The absence of this knowledge has led to a situation where many people do not know how to manage their finances systematically.

Creating financial literacy

Across the world, people are realizing the importance of financial literacy. Fluctuations in economy, job loss, rising prices have all made people aware of the importance of managing their finances. Many organizations in the private sector promote financial literacy through seminars and training programs. Governments across the world have woken up to the importance of financial literacy and are offering programs of their own.

Colleges and Universities are now offering courses on financial literacy. There are proposals to make such courses mandatory at the college level. This would help young people understand the importance of managing their finances. When they start earning, this knowledge would help them cut down wasteful expenses and save money wisely for the future.

Planning one’s finances, budgeting, avoiding debt traps, avoiding financial fraud, investing wisely for the future are areas on which every individual needs to be educated.


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