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How Financial Literacy Affects Your Income, Debt and Wealth Levels

How Financial Literacy Affects Your Income, Debt and Wealth Levels

Chloe Harris - Featured writer

Financial literacy is understanding money: how it’s earned, spent, and grown. It also extends on how money is used to help others. Research indicates that financial literacy has a critical correlation to income, debt, wealth accumulation, and retirement planning.

Credit Capital’s senior credit advisor, Alistaire Claire, emphasises its importance,” Learning and applying basic finance concepts in your everyday life is the way to financial security. Without the right knowledge, it’s easy to commit huge financial mistakes. It is through lack of financial literacy that people fall for fraud investment schemes and credit card debts. Just knowing the basics can provide you with a level of protection.”

Sadly, research shows that there’s widespread financial illiteracy in Australia. Data shows that 1 in 3 adult men and 1 in 2 adult women don’t have a basic understanding of inflation, interest, and risk diversification.

If you’re still unconvinced, let’s take a closer look at how financial literacy can improve your quality of life:

 

Teaches how to budget so that you can meet all your necessities and desires

Budgeting is the allocation of money to specific purposes and is the first step to money management. To come up with a sensible budget, you must first determine the amount coming in and your priorities. Once you’ve allocated your money, strive to stick to the plan to avoid overspending or neglecting essential matters. Revisit your spending plan time and again to see if it’s effective.

 

Helps avoid or manage debt

A financially literate person will try to avoid debt but also understands that it’s not always bad. Because not all of us were born in the upper strata of society, we tend to create little debts along the way. Some instances force us to borrow money from friends, relatives, and financial institutions. With financial literacy, you’ll be aware of ways to get out of debt, such as debt consolidation. You’ll also be able to identify the “leaks” in your lifestyle that is preventing you from accumulating wealth. These may include unnecessary purchases and overdue credit card bills.

 

Motivates you to build an emergency fund

One of the most effective ways to prevent debt is by building an emergency fund, which you should only access for highly-important expenses. Financial experts encourage everyone to set aside a portion of their monthly income for a 3 to 6 months’ worth of expenditures. Of course, you must also replenish the fund once you’ve recovered financially.

Makes you realise it’s not too early to plan for retirement

Many adults admit that one of their biggest financial regrets is not planning their retirement. Financial experts advise that the emergency fund should be concurrent with the retirement fund. When you’re financially literate, you’ll know that there are other ways to grow your retirement savings other than putting it in the bank.

Becoming financially literate isn’t difficult these days. There are plenty of free online resources that teach us the basics of money management. You may also approach financial consultants who can guide you more closely.

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