The concept of financial literacy refers to knowing the basics of financial concepts to make smart decisions. Specifically, financial literacy can help prevent costly mistakes that could derail your life plans, prepare you for emergencies, help you reach your goals, and can help provide you a comprehensive view of your financials while giving you the confidence you need to make important decisions.
Let’s look at some of these benefits. Firstly, having financial literacy can help prevent costly mistakes. For example, knowing the difference between a fixed and floating-rate loan, the latter of which changes month-to-month, can keep you from taking a loan that could rise too high for you in a later month. In addition, you may currently contribute a chunk of change to your IRAs or 401(k)s without knowing when you can withdraw those funds without penalty. So, if you were saving money to your 401(k) to make a down payment on a home purchase, you’d most likely face a 10% penalty if you borrowed those funds before the age of 59.5. You could also see your account values drop if your investments didn’t perform well. That does not even include the red tape sometimes involved in accessing funds from an employer-sponsored account.
In short, decisions that seem financially prudent, such as maxing out a 401(k), can actually hinder your ability to meet your financial goals if you don’t know the basics of the tools you’re using.
Secondly, financial literacy can help you soften the impact of an emergency. If you hold to a budgeting strategy that favors your savings, you can help cover unexpected costs that can occur from an untimely job loss or an emergency health expense. Extra financial padding can get you back on your feet by allowing you the time needed to find a new job in line with your career path, rather than having to take any job quickly due to your financial situation.
Ultimately, financial literacy can help you reach your financial goals, simply by being aware of the small things. You can create strategies that set expectations, hold yourself accountable for your finances, and set a course for achieving goals. Though someone may not be able to afford their dream lifestyle today, they can always plan to increase their odds of making it happen. Think of your finances as your ship on a journey; one small hole in the bottom of your ship can bring the whole thing down if left unfixed.
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[1] https://www.investopedia.com/terms/f/financial-literacy.asp
[2] https://www.investopedia.com/articles/retirement/08/401k-info.asp