Why is financial literacy important to good personal finance management?

 

Do you have a plan for your future? The answer is most likely a quick YES!

Does that plan include a financial plan (a budget to control your spending, saving and dictate your invesments)? The answer more likely a NO! 

Many make plans for the future without including a financial plan in them. Why do they ignore this all important map and means to get to their goals? It's most probably because they don't have a financial literacy. 

What is financial literacy?

Financial literacy is the acquisition of at least,  a basic financial knowledge that helps you to know how to fill your needs, spend responsibly and still set aside (save) a portion of your income for the future. 

Why is it important to save a portion of your income? So that you can have a significant portion of capital that may be required to invest, grow and secure a lifetime financial stability

Also for the sake of the protection of your investments (and your entire personal finance) against future risks and unertainties , financial literacy is very very important.

The possession of quality financial literacy therefore, improves personal financial decisions about budgeting (the primary importance), savings, investments, insurance and the building of a reliable nest egg (retirement savings). 

It's worthy to note that;

 

"An investment in knowledge pays the best interest." — Benjamin Franklin.

An investment in financial knowledge pays the best interest that is large enough to guarantee financial freedom and stability in the present and in the future.

What are personal financial activities? They are explained below;

1. Budgeting - 

The simplest definition of a budget is “telling your money where to go.” – Tsh Oxenreider.

Budgeting is the process of preparing a detailed short term personal financial plan that is expressed in monetary terms.

The process of budgeting yields a financial plan ( an estimate/a budget) of expected revenue and expected expenses for a given period, usually one financial year.

A good personal financial budget should make the effective control of control of spending possible. It should also encourage savings and  the development of a sound investment habit.

2. Spending -

A sound financial knowledge gives you the power to keep your spending within budget, on filling absolutely necessary needs and avoiding unnecessary spending. Unnecessary spending creates indebtedness and discourages savings.

3. Savings - 

Revenue for a specific period - Expenses for the same period = Savings for that period.

As mentioned in (2) above, a good personal financial knowledge should help you weed out unnecessary spending and save a substantial amount within a specific period.

Why is it important to have savings?

4. Investment -

Investment is one of the primary reasons to have a substantial amount of savings at a given time.

This is because as Muhtar Kent correctly observes, "Without investment there will not be growth, and without growth there will not be employment." 

So, when you invest, you create opportunities for yourself and for others to grow and be employed.

A good investment is an asset that generates positive returns. These returns could form a significant equity contribution to a small-to-medium scale business startup capital, which would create jobs.

5. Insurance -

Life is full of risks and uncertainties. Tomorrow is promised to no one. 

There are no guarantees that uncertainties would not arise  tomorrow to destroy today's certain source of survival. 

This is a reality of life and this reality makes it necessary to protect (insure) your personal finance.

This protection may be in the form of taking out relevant insurance policies but you must know the relevant insurance policies to go for. 

How would you know the insurance policies needful and relevant to you, your family and your business? This is where the acquisition of a sound financial knowledge is useful. You need a financial knowledge to guide you to experts.

Other forms of protection against possible loss of financial stability in future are investment in less volatile assets like real estate and building a sufficient nestegg.

6.  Nest egg - 

Often  many self-employed business owners don't see the need to save a substantial amount of money for retirement. A nest egg could be used to take care of unexpected emergencies.

The above benefits of having a substantial retirement savings are a product of financial literacy.