If you’re willing to commit the time and put in the effort, you can get all the advantages that come with becoming financially literate. All you have to do is invest your time now, and you can reap a lifetime of benefits. In this article we will try to understand why financial knowledge is so important and why financial literacy is an essential skill you must develop to enjoy financial independence.
Usually most of the people search for best investments to invest their money. But very few think of investing in their financial education. People don’t realize that, at the end, your financial knowledge will be your best investment. Amazingly, a skill this important, that can make or break your financial success, isn’t taught in any school or college. You can graduate with a master’s degree and still be clueless about personal finance or investing. But if financial wisdom is so essential then why doesn’t everyone master these skills and develop their financial literacy? Because it requires time and effort. That’s it. There are no other disadvantages.
What is Financial Literacy?
Financial literacy is education and understanding of various financial topics like personal finance, managing your money, taking good investment decisions and planning your retirement.
“If a man empties his purse into his head, no man can take it away from him. An investment in knowledge always pays the best interest.” – Benjamin Franklin.
If you are young, then the first investment you can make is towards your financial education. The knowledge you gain today will accompany you forever and help you attain your financial goals.
Financial literacy is different than becoming a financial expert or a financial advisor. Financial awareness teaches you how to manage your money and pay your bills, how to borrow and save money responsibly and how to plan and invest for your retirement.
There are numerous ways to enhance your knowledge about finance. You can refer to various sources like finance books, articles on financial websites, finance portals and news sites, periodicals, personal finance magazines, etc.
Internet is a best source to get updated information, to learn new skills and increase your financial awareness but some things will only come through experience over a period of time. You should start with the basics first.
Why is Financial Knowledge Important?
- Financial knowledge gives you financial freedom
- You can never lose by investing in financial literacy
- Financial knowledge compounds like money
- Financial knowledge makes you financially responsible
- Financial knowledge can help you to avoid conflict of interest
- Financial knowledge can help you to choose the right investment
- Financial knowledge can help you to trust the right people
Financial Knowledge Gives You Financial Freedom
Regardless of how much money you have, you will never enjoy financial independence if you are dependent on experience and knowledge of other people to manage your money or to advise you on financial matters.
There is a long list of people who have built vast fortunes and then lost everything because of financial ignorance. Lack of financial knowledge will always be an obstacle on your path to financial freedom and security.
When you choose the path of financial literacy and start making independent decisions, it will lead to financial wisdom. You will learn how to fish and never be dependent on any other person to give you a fish.
It will allow you to ignore all the confusing and conflicting advice offered by others. You will be able to analyze through different opinions using your own knowledge and decide what is suitable for you and your portfolio.
You Can Never Lose By Investing In Financial Literacy
Becoming financially literate is similar to buying an annuity. It is a one-time investment that can pay you dividends for the rest of your life. People can steal your money but they can never steal your financial knowledge.
Financial education is like compounding. The sooner you start, the less you have to invest. And once you have invested enough you can start reaping huge benefits for a long period of time.
Many schools have different programs to increase financial and banking awareness among students. They have various courses that cover personal finance and financial literacy for high school students.
Financial Knowledge Compounds Like Money
Once you start on the path of financial literacy, your knowledge will compound like money. As you read about various topics and start connecting the dots, your financial knowledge will start compounding.
Financial knowledge acts as a ceiling to your financial growth. Once you start increasing your financial knowledge, you will realize how high you can financially grow. Your financial knowledge will set the limits on your financial success.
Once you learn how to make good investment decisions, you will make fewer mistakes and your return on investment will improve which will translate into more money into your investment account.
Your goal should be to invest regularly in financial literacy, just like you do in your investment account. When you do this, you will increase your financial knowledge which will increase the possibilities and will give you a lifetime of financial security.
Financial Knowledge Makes You Financially Responsible
Many people believe that their financial advisors will take care of all their financial planning like retirement planning or wealth planning. They just delegate the authority without bothering to learn anything.
Whether you take the advice of financial experts or you invest independently, you are still responsible for all your investment results. You can delegate authority but you cannot delegate responsibility.
Your every decision is your choice. You decided on the financial expert. You decided on which investment to buy. Now if you don’t like your investment results, you are the only one who is responsible.
There is no substitute for knowledge. If your investment decisions are not based on knowledge, then you have no right to complain about your investment returns.
The only way to make consistent and smart investment decisions is to learn what works and what doesn’t. Your financial knowledge will play a very big role in your investment success.
Financial Knowledge Can Help You To Avoid Conflict Of Interest
The only person who is committed to your financial well-being is yourself. If you do not learn how to invest your money, no one else will care about it as much as you do.
This becomes more important if you are young as it will help you to prevent from making poor financial decisions or financial mistakes which can take years to rectify.
Financial advisors can give you investment advice but most of the time they will have a conflict of interest. Nobody can make financial decisions for you with zero conflict of interest except you.
Financial knowledge can help you to avoid such conflicts of interest by giving you the necessary skills so that you can differentiate between fact and fiction and choose the best advice that is suitable for you and your portfolio.
You are the only investment advisor for your portfolio which has your best interests at heart. Everyone else is in the business of looking out for their own best interests.
Financial Knowledge Can Help You To Choose The Right Investment
There are many different types of investment options available and there are many sources from where you can learn about them. There is nothing secret about investing and all the information is readily available.
If you do not want to pay thousands of dollars to financial advisors, you can get similar advice from books or financial websites. But one thing the books or websites will not tell you is, out of so many investment strategies which one is right for you.
Not all investment strategies will work for all the people. Your job is to find out the strategy which is personalized according to your financial situation and will work on your current portfolio.
Every investor is unique with unique set of preferences and tolerance to risk and reward. Your financial success will result from an investment plan that capitalizes on that uniqueness.
That is the reason why financial education is important so that you can learn about various investment and trading strategies and design a custom investment plan which will be aligned with your investment philosophy.
Financial Knowledge Can Help You To Trust The Right People
Most of the time financial advisors and investment experts will give you differing and often conflicting investment advice which can be partially true or partially false depending on the situation. This is especially true during a financial crisis.
True financial experts know that most of the investment strategies are complex. Even the most basic investment ideas like investing in a right mutual fund or choosing an appropriate insurance policy cannot be adequately explained in a few sentences.
During such situations financial knowledge can help you to identify and trust the right people. It can help you to understand the subtle differences and conditional truth behind all the investment advice.
How to Protect Yourself Against Financial Frauds?
Financial fraud happens when someone takes your money through deception or criminal activity. One of the biggest reasons to acquire financial education is to protect you against financial frauds.
Hackers and thieves are often several steps ahead of law and enforcement agencies and financial frauds are increasing every day. Understanding different types of prevention methods can help you to protect your money.
- Never disclose personal information over the phone
- Never reply to emails asking for personal information
- Review your financial statements regularly
- Secure all the purchase receipts
- Close unnecessary credit cards and bank accounts
- Keep your personal information private
- Protect your digital information
Never Disclose Personal Information Over The Phone
Never, ever give out any finance or banking related information over the phone, especially if you are not the one who initiated the call. Get the caller’s information and tell them you will call back with required details.
Once you get the caller’s name and number, you can always call the company’s main number to verify if he is indeed with that company and has a legitimate business reason for contacting you.
Never Reply To Emails Asking For Personal Information
You may have seen official looking emails from loan or mortgage companies asking you to visit their site and login to your account to verify your personal information. This practice is known as phishing.
Hackers can create websites and generate email addresses which look genuine but they are not real. If you visit the website and provide your personal information then you can become a victim of phishing scam.
Review Your Financial Statements Regularly
Financial institutions like banks may call you if they notice any unusual activity in your account. But you can also discover such activities by going through your monthly credit card or bank account statements.
You do not have to balance your bank account statements. All you have to do is to review the transaction description and verify if all the transactions were done by you and are correctly debited or credited.
Secure All The Purchase Receipts
Whenever you make any purchase, make sure that you secure all the receipts, especially those that contain your personal or account information. Once in a month, you can cross check them against your monthly statements.
When you no longer need the receipts, do not dispose of them in the garbage because it may eventually end up in the wrong hands. Always rip up the receipts or destroy them using a shredder.
Close Unnecessary Credit Cards And Bank Accounts
The more credit cards or bank accounts you have, the more likely you are to have problems with identity theft or financial fraud. Also more credit cards mean that you are likely to overspend and increase your debt.
For most people, a single credit card is sufficient for all their needs. Ideally you should prefer a debit card over a credit card if you have a history of accumulating credit card balance and not paying the bills on time.
Keep Your Personal Information Private
Do not write or store your personal information where it can be easily accessed. Also make sure that all the envelopes and mails with your home address printed on it are stored in a safe place or shredded if not required.
Protect Your Digital Information
If you store your personal information and financial data on computer, then you should take measures to protect your computer and safeguard your confidential information.
You should install a firewall and have good antivirus software on your computer. Also all the files with confidential information should be password protected.
Financial education is a long term approach to financial independence. If you work on yourself and study regularly, financial knowledge can grow your experience and portfolio simultaneously so that you can retire early and wealthy.
Financial education is your best investment and you should commit to grow and improve your financial literacy so that you can get all of these advantages.
- Increase your earning potential
- Increase your return on investment
- Protect yourself against financial frauds
- Secure your retirement
- Improve the quality of your financial life
- Attain financial independence and security