Why financial literacy matters
I think it’s no exaggeration to say: Today’s economic environment in the 21st century is becoming increasingly complex.
The labour world is changing. “Planning” linear professional careers to the same extent as in the past, has become rather difficult. Demographic challenges put state pension systems under pressure in many places.
Against this background, I personally think it’s even more important today to take your personal finances into your own hands:
- as regards handling your income
- ar regards handling your old-age provision
And this is where financial literacy comes into play. The long-term goal of financial literacy should be the ability to make sound financial decisions.
Mastering your personal finance management is crucial for achieving your personal goals and securing your own long-term financial stability.
I think everyone should acquire a solid financial literacy – for the following reasons:
Financial literacy…
- … provides an understanding of general financial topics such as old-age provision, taxation, insurance (which are important for a comprehensive personal finance management).
- … prepares you for proactively pursuing your own long-term financial goals.
- … enables you to get the full picture of your own financial situation, make well-founded decisions and manage your financial resources efficiently.
- … makes you aware of the importance of setting up a budget, control expenses, reduce private consumer debt, and build up an emergency fund for any kind of inconveniences.
- … leads your way to learn the basics of investing and wealth accumulation to achieve your long-term financial goals.
- … makes you aware of the opportunities and risks associated with your own financial decisions.
Now let’s dig a little deeper.
Which personal traits should be fostered through financial literacy?
I personally think financial literacy should also serve as a “tool” to sharpen certain personal traits.
Following list is non-exhaustive, of course. Just to present you those ones that I personally consider most important:
a) Long-term thinking
Financial stability & independence is a marathon, not a sprint. It will take many years to achieve these long-term goals. A profound financial literacy will keep you on track and ensure you don’t lose sight of your goals.
b) Sense of responsibility
Financial literacy promotes a high sense of responsibility when it comes to managing your personal finances. You will sharpen your senses when it comes to your spending, avoiding private consumer debt or using your financial resources efficiently.
c) Self-determination
Financial literacy empowers you to make independent decisions about your personal finances. You will be able to define your own personal financial goals and develop tailored strategies to achieve them.
d) Financial self-confidence
With a good understanding of how to manage your money, you will feel more confident and better skilled to deal with challenges of any kind that may arise in your life.
And with an increasing financial nest egg, you can live your life more and more on your terms, i.e. you become less dependent from other people and professional challenges.
e) Stress resilience
Financial worries can lead to high levels of stress. But if you are financially literate, you will be better able to deal with financial challenges and are less prone to financial stress. The bigger your financial nest egg is, the better you can sleep.
f) Disciplined income spending behaviour
You can’t spend more than you have. If you are financially literate, then you will be better able to focus on (raising) your income side. You will rather think twice when you should or should not borrow money. You will be able to avoid private consumer debt or get your debt under control.
g) Risk management
Financial literacy helps you evaluate the risks being associated with your own financial decisions. You will be able to minimize financial risks and protect your long-term financial security. This applies especially to your stock market investing journey.
Set yourself clear goals!
Imho, financial literacy and related specific knowledge about budget and stock market investing are a means to an end. Not an end in itself.
The purpose at the end should be your individual goals – and the awareness that your personal finances have an impact on your life and the achievement of your goals.
To break it further down, you should ask yourself following questions: What are your personal, professional and financial life goals? And how do you manage to finance these goals and dreams?
That could be for instance:
- Your own real estate property (to be rented out).
- A 2-year-trip around the world.
- A sabbatical or regular workation abroad.
- Executing and financing your own business ideas.
- Founding a business company with employees.
- Trying out multiple professional careers.
- Entirely living off dividends to cover your monthly expenses (without having to work)
- Retiring early and stop working forever.
- … and many more
You see: Our life goals and dreams are as individual as we are.
But all these goals and dreams have one thing in common: You need money to realize them.
And if you are not one of those lucky guys who got a large inheritance or won the lottery, you have to make sure that you accumulate the necessary money by yourself.
Your “WHY” matters
In this context of goals, I think you should also go a bit deeper and try to find your “WHY”. Link this “WHY” to your personal , professional and financial goals.
Just as an example:
“My goal is to execute my own business ideas”. WHY? “Because I have an expertise with which I want to create added value for customers.
“My goal is to live entirely off dividends to cover my monthly expenses”. WHY? “Because I don’t want to worry about failures. For instance, if I fail professionally, I will still have a roof above my head and always food in my fridge.”
“My goal is to do a 2-year trip around the world”. WHY? “Because I want to experience new cultures and influences, on order to enrich my personal growth”.
So whatever your personal “WHY” looks like – I think you will definitely need it.
Financial literacy will help you shapening your personal, professional and financial future, goals and your WHY.
Some mindset work: Eliminate negative beliefs on money
When it comes to money, there are many negative beliefs about money, e.g:
- “Money is evil.”
- “Having lots of money is selfish.”
- “Health matters more than money”.
You should get rid of this attitude. It’s much better reformulate these negative beliefs in a positive way:
- “Money is a useful tool to live my life and to pursue my goals.”
- “Money gives me many opportunities and resources to help other people if they need it.”
- “Money enables me to take better care of my health”
If you think negatively about money, then money won’t find its way to you.
Obviously, money alone does not make you happy. But money can certainly make your life more carefree and enjoyable.
And of course, it also depends on what you do with the money. Focusing excessively on consumer goods and shopping won’t make you happy in the long run.
But using money to build a financial nest egg to live a self-determined life, will maximise your happiness. For sure.
At the end of the day, money is not a status symbol. It’s a tool. If being used in a positive sense, then there is no reason for negative beliefs.
Conclusion
You will only be financially successful if you are prepared to build up the necessary knowledge: Financial literacy. It will make you free and independent in financial matters. Financial literacy is a useful tool to pursue your personal, professional and financial goals.
Did you like the article? What’s your opinion? Drop me a line!