Build a Strong Financial Foundation: A Case Study on Personal Financial Literacy and Financial Well-being .
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In this article, We’ll talk about the value of individual financial literacy and how it relates to financial security.
We will examine crucial tactics and helpful advice to improve financial literacy, manage money well, set financial goals, and ultimately achieve a state of financial well-being,
- Table of Content
- Understanding the basics of Personal Financial Literacy (PFL)
- The Pitfalls of being Financially illiterate and not practicing Financial Discipline?
- The Importance of Personal Financial Literacy.
- Nurturing financial literacy within yourself and family
- The Transformative Impact of Financial Literacy on Personal Financial Management
- Final Thoughts
Have you observed or met a person or read about people who went bankrupt or struggled financially even after an exceptional career for a few decades, be it a sportsperson, film star, Harvard graduate, or a highly paid MNC executive?
Inadequate income is rarely the reason; it may mostly be one of more of the following
- Poor Financial Decisions
- Lack of Financial Discipline
- Purchase of Wrong Assets
- Very High Spending Habits
People who have not heard these stories may google ‘Rapper 50 Cent’ who was once worth US$155 million, filed for bankruptcy in 2015; ‘Mike Tyson’ thanks to his lavish lifestyle, filed for bankruptcy in 2003; Michael Jackson was in debt of US$400 million when he died in 2009; Nicholas Cage, one of the most popular actors of Hollywood, had to sell his personal belongings and assets to pay tax bills; Mayweather who never lost a boxing match had to come out of his retirement to settle his debts and tax bills.
Source: Business Insider
Bankruptcy or poor financial health is not restricted to famous personalities, it can even happen to normal employees and small business owners.
It can happen to our neighbors, colleagues, and us if we don’t emphasize financial literacy and manage our finances well.
Still, if you think it happens mostly to high-profile individuals and you are safe without financial literacy, here is a statistic to ponder: As per the Malaysian Government’s insolvency department, sixteen people were declared bankrupt each day in 2022. Many bankruptcies had a debt of RM100,000 to RM499,000. Now let us talk about a large country such as the US, where in 2022, the non-business bankruptcy filing was 370,685 cases, although it improved from 752,160 in 2019.
Personal financial literacy helps us escape these situations and build a sound foundation for our economic well-being.
Understanding the basics of Personal Financial Literacy (PFL)
As per Investopedia,Financial literacy is the ability to understand and utilize various financial skills, such as personal financial management, budgeting, and investing.
It encompasses comprehending essential economic principles and concepts like the time value of money, compound interest, debt management, and financial planning.
When it comes to personal finance, financial literacy becomes the driving force behind individual financial decision-making.
It empowers individuals to manage their money effectively, choose suitable savings and investment options, handle credit cards wisely, achieve financial goals, purchase property, save for their children’s education, and plan for retirement.
Hence, Personal Financial Management (PFM) and financial literacy are deeply intertwined. Excelling in PFM requires a strong foundation in financial literacy.
By focusing on enhancing their financial literacy, individuals can strengthen their ability to navigate personal financial decisions and succeed in effectively managing their finances.
The Pitfalls of being Financially illiterate and not practicing Financial Discipline?
Today we are absorbing social media like never before, and social media encourages us to spend as if there is no tomorrow.
Furthermore, influencers provide all types of advice; therefore, unthinkingly following any advice without any foundation of PFL is a landmine.
Social media is full of people enjoying all the luxuries, including expensive designer clothes, vacations, etc., and we tend to get attracted towards it and become victims of the fear of missing out (FOMO), but what is the reality?
61% of Americans live paycheck to paycheck, including those earning as high as US$250,000. This doesn’t mean one should not live a comfortable life, but spending beyond your means or without savings is not ideal.
All these social media ads and buy now pay later schemes are forcing us to spend extra. In terms of investment, too, investing in crypto was led by social media, and several people burnt their hands who had no clue about it.
This points to one direction: no matter how much you earn, PFL is important and the need of the hour.
The Importance of Personal Financial Literacy.
Personal financial literacy is vital, instilling checks and balances while laying a solid foundation for wealth accumulation.
It acts as a safeguard, preventing individuals from succumbing to reckless spending habits that jeopardize their future financial well-being.
By fostering financial discipline and awareness, PFL empowers individuals to cultivate their financial resources and detect unethical or discriminatory financial practices and products.
Moreover, PFL equips individuals with the necessary skills to effectively navigate life’s economic challenges on their terms.
Many individuals encounter substantial losses during unforeseen circumstances, such as medical emergencies or job loss, primarily due to insufficient health insurance coverage and emergency funds.
Financial illiteracy often results in individuals failing to establish an emergency fund of more than six months of more than six months, separate health insurance coverage other than employer-provided plans, or invest in a retirement plan.
The absence of such safeguards exposes individuals to the risk of plunging into poverty, derailing their financial aspirations.
Every Individual must have a well-defined financial plan and disciplined approach. One must contemplate on how to navigate the increasing longevity of life, surging inflation rates, and other potential challenges.
Related Article: 8 Reasons why you should file your ITR now if you missed it!
Nurturing financial literacy within yourself and family
There needs to be more emphasis on PFL in schools and colleges; therefore, parents should take this responsibility instead of relying on schools and colleges.
- To start with, parents can open a kid's account in a bank and help the kids understand deposits, interest, compound interest, etc.; a few regular visits to banks to deposit pocket money is not a bad idea to encourage your kid to save money.
- As kids these days spend time surfing the internet and YouTube, they can be introduced to personal finance content such as 'Warren Buffett's Secret Millionaires Club.'
- As kids grow up, parents can transfer their bank account to them as per the Bank’s mandate along with any investments such as Fixed Deposits and discuss further the different instruments to save and invest, including fixed deposits, bonds, mutual funds, stocks, insurance, etc.
- With this information and training, when a person starts to earn, they are less likely to make blunders and will be better equipped to handle their money.
What if someone who has started earning needs to learn more about managing finances?
- One can start by reading some good books on this topic, such as 'Let's Talk Money' by Monika Halan and ET Wealth.
- One can also read ‘Money’ section of ‘One Liner magazine’ regularly or any personal finance related articles from reputed financial newspapers, magazines or websites such as Economic Times, Mint, Moneycontrol etc.
Start practicing financial discipline and investing for some goals.
- It is never too late to learn personal finance, and one should be open to discussing this topic with spouse and kids and tie up their goals accordingly.
- One can also seek advice from a registered financial adviser or certified financial planner.
The Transformative Impact of Financial Literacy on Personal Financial Management
Personal financial literacy acts as a catalyst, empowering individuals to apply financial skills and master the art of personal finance management.
Through proficient personal financial management (PFM), individuals can avoid pitfalls and ill-advised financial decisions that often lead to bankruptcy.
Once individuals become adept at PFM, they embark on a transformative journey, making prudent decisions regarding credit cards, embracing financial discipline to bolster savings, strategically selecting investment vehicles (be it equity or debt), initiating contributions to retirement plans, opting for income-generating assets, and exercising cautious leverage.
Individuals and their families can substantially enhance their financial well-being by evading reckless spending and removing ill-fated investments, bringing them closer to realizing their economic aspirations.
Moreover, financial literacy instills the invaluable culture of budgeting, curbing expenditures, and optimizing monthly savings.
It’s worth noting that financial discipline transcends mere age or mounting obligations and responsibilities.
It blossoms through the symbiotic relationship between financial literacy and the profound understanding of the influential dynamics of savings and compound interest.
With these informed decisions and honed skills, individuals increase their chances of attaining financial stability and realizing their long-awaited financial goals.
Final Thoughts
Financial literacy helps make informed decisions on finances, avoid unwanted high debt, build income-bearing assets enabling peaceful retirement with adequate income, and tackle any financial emergency.
This process should be started young to bear the fruits early. Topics of PFL(Personal Finance Literacy), like the time value of money, financial discipline, compound interest, vehicles of investments, etc., should be part of the curriculum of high schools and colleges to make students aware early in life.
Financial illiteracy is no less than a pandemic, a global problem, and not just in India.
The Great Financial Crisis of 2008 and covid had caught people off-guard when they lost jobs or even lost the life of primary income-earning member of the family without adequate emergency funds and income-generating assets, insurance, etc., creating havoc in their life.
It is high time we focus on PFL(Personal Finance Literacy) and, in attaining proficiency in PFM, take responsibility for developing it in kids and youth.
Remember, one can become bankrupt even after getting a high-profile job and working for 1-2 decades if the person makes wrong financial decisions because of a lack of personal financial literacy.
PFL(Personal Finance Literacy) doesn’t come just because one has gone to IITs or even done CA or an IIM graduate. It has to be learned, developed, and practiced with discipline.
Disclaimer: This article is only for awareness and learning. The Author has no financial interest in the books or sources shared in the article. For further guidance, please seek help from a registered financial advisor or certified financial planner.
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