Want to learn how to make your money work for you and turn your savings into millions? Well, becoming financially literate is the ideal place to start. Financial literacy is an essential life skill that everyone should have, yet most people don’t. Becoming financially literate will help you to develop key financial skills for effective money management, building wealth, and ultimately gaining financial independence.

Financial literacy

What does it really mean to be financially literate? Simply put, financial literacy means knowing how to handle your money wisely and make it work for you. Many people struggle with financial literacy, even as adults. This is often due to misconceptions or a lack of understanding about what it entails. Firstly, financial literacy is not just about knowing how to budget as this is just one aspect. It also requires understanding financial principles and concepts such as financial planning, compound interest, debt management, investing and risks, and the time value of money. Have you heard the story about Ronald Read, the janitor who had US$8million in savings when he died in 2014? Yes, you read that right — a janitor, US$8million, and he didn’t win the lottery or inherit the money either; he just saved consistently throughout his life, while letting the wonders of compounding do its thing. The moral is that your behaviour with money is oftentimes very important. Therefore, even if you don’t work as an investment professional you can generate wealth by making sound financial decisions. Overall, being financially literate can lead to a better quality of life, whereas financial illiteracy can lead to poor financial choices — which can negatively affect an individual’s financial well-being.

How does being financially literate benefit you?

Financial literacy affords individuals a wide range of benefits:

•Preparation for Financial Stability and Independence: One of the most significant benefits of financial literacy is to empower individuals to make smarter decisions about their finances and thus prevent devastating mistakes. Financial literacy enables individuals to understand the impact of their financial decisions on their overall financial health, enabling them to make better-informed decisions. For instance, a financially literate individual is better equipped to compare different types of financial products, make informed decisions about which products best suit their needs, and make sound decisions about risks and how to navigate them.

•Improved Debt and Money Management Skills: Financial education also helps individuals manage their spending more effectively and make better use of debt. People who become financially literate learn how to create a budget, manage and use debt correctly, and save and invest for the future. Financial literacy helps individuals avoid debt traps and develop healthy financial habits that will benefit them in the long term, such as having a long-term investment plan that can withstand bouts of volatility; and choosing a solid retirement plan — which can help them lead a financially stable life — and good health and life insurance plans. Furthermore, understanding financial concepts like interest rates and repayment terms empowers individuals to manage debts responsibly, avoid high-interest debt traps, and learn how to use debt as a tool to build wealth — after all, not all debt is bad. “Bad debt” is used to fund items that quickly lose their value whereas “Good debt”, on the other hand, is used to acquire assets that can appreciate in value and/or deliver returns that exceed the cost of servicing the debt, like buying solid real estate, or furthering your education. These are things that have the potential to generate long-term income and help you build wealth.

•Financial literacy benefits not just individuals but it is also beneficial for the overall economic well-being of society. Financially literate individuals are more likely to save money, invest in real assets and in themselves through higher education and training, and start businesses. This results in a more prosperous and stable economy as individuals are better equipped to contribute to the growth and development of the economy.

When is the right time to start?

The path to financial literacy should start with young children who are just learning their numbers and who come to understand money through playing with and observing the people closest to them. In doing so, children from a very early age learn that you can do four basic things with money: spend, save, invest, or give it away. Eventually, these concepts are brought into their adolescent and adult lives, playing a critical role in the purchase of a house and the idea of mortgages, equity financing, buying a car, and dealing with loan repayments and interest payments. However, if you never had an early start, it is never too late to begin working to become financially literate. It will pay dividends for years to come.

At its core, being financially literate means being knowledgeable about money management — saving, investing, and debt management and using that knowledge to make sound financial decisions that help you to meet your financial goals. Importantly, promoting financial literacy through education and resources can positively impact individual well-being and that of your family, build generational wealth, and contribute to a stronger economy. It empowers you to take control of your financial future and make choices that help you realise your financial goals and build financial independence. Unfortunately, this is knowledge that most people lack, and being financially illiterate can be very damaging to your long-term financial success. Therefore, becoming financially literate provides you with the tools and resources necessary to avoid pitfalls, such as being more prone to accumulating unsustainable debt burdens, and poor money management skills which prevent you from gaining financial independence and building wealth. Now is the time to make your money work for you so don’t be afraid to ask questions, seek help, and continuously educate yourself about financial matters. Over time, your improved knowledge will lead to better financial decisions and greater financial security.