What is Financial Literacy
and why do we Need to Know About it?
It’s that buzz phrase that you may have heard bandied about a fair bit recently. Perhaps you’ve come across the term financial literacy in the news or whilst scrolling through your Instagram feed. First things first, financial literacy is most certainly something we need to get up to speed with if we’re to champion our financial future.
What is Financial Literacy?
At its most simplistic, financial literacy is defined as ‘personal financial education’ — knowledge which allows individuals to manage their money effectively. It’s estimated that 50% of the UK population is considered to be ‘financially vulnerable’ and over
4 million are thought to be in serious financial difficulty. These figures prove that something has gone amiss in the UK education system for this to be the reality for so many British citizens.
So we know broadly speaking what financial literacy is but what does that look like broken down into easy to action steps?
There are 5 key components of financial literacy which once aware of, can make a massive difference to feeling in control of your personal finances.
1. Understand Budgeting
It may sound simple but in a society where it’s possible to put pretty much anything on plastic, budgeting is a skill that is neglected until needed. Aggressive marketing and encouragement of consumer driven lifestyles leaves millions of Brits living beyond their means. Budgeting means taking control of personal finances and altering spending habits. It builds goal-orientated thinking and requires self-discipline. Implementing a budget for yourself and/or your family is a massively positive step towards financial freedom.
2. Start Saving
The sooner the better. On one level we understand the necessity to create a savings account which can give us peace of mind, but implementing it is another thing. It’s easy to slip into the ‘I’ll start it next month’ type of mentality but creating an emergency fund goes a long way to securing financial wellness. Like any new habit it takes some time to become ingrained but the feel good factor of knowing that you are in control of your financial situation, regardless of external factors, is immense. It’s about making money work for you and creating an empowering attitude towards saving.
3. Get to Grips with Interest Rates
For many when it comes to interest rates expressions may quickly become glazed over. It’s something that may have been touched upon in GCSE maths many moons ago, but somehow trigonometry took priority over real life empowering financial literacy. The good news is that it’s never too late to become educated on the things that the school curriculum left out. Getting up to date on aspects of financial education, such as compound interest and finding a savings account with the best interest rates will benefit you no end. The master of making money work for you, Martin Lewis has plenty of great resources on this.
4. Avoid Credit-Debt Cycles
The National Student Money Survey last year reported that 49% of students said they use their student overdraft as a source of income and 52% said they turn to banks when they’re in need of emergency cash. Students in particular are vulnerable to becoming trapped in the credit-debt cycle with student loans and interest free overdrafts being presented as free money. This in turn leads to an enormous amount of stress when it comes to paying back fees, loans and overdrafts. Seeing through the propaganda of banks and loan companies equates to steering well clear of being trapped in the system.
5. Importance of Safety and Security
The way we manage and use money has radically transformed over the past ten years thanks to developments in financial technology. Money has been made easier in every sense of the term. Easier to send, to receive, to share and to save. Make sure that you are putting preventative measures in place to eliminate the risk of identity theft and fraudulent activity on your accounts.
As mentioned above, over 4 million people in the UK are thought to be in financial difficultyand more than 6 million British people believe that they will never be debt-free. These statistics show that as a nation we are dealing with a financial literacy crisis. The thing about a crisis is that whilst it’s difficult to face, it offers a crucial opportunity to re-evaluate. A crisis is the realisation that something has to change and that a turning point has been reached.
We can’t fix something that we can’t see, so the acknowledgement that 50% of the UK population is considered to be financially vulnerable means that steps forward can be taken to create positive and lasting change.
Where do we go from Here?
1. Create a Support System
First things first, if you’re experiencing financial hardship right now know that you’re not alone. It’s okay to admit that spending may have got out of control, or that you don’t know what interest rates are. Having real and open conversations about personal finances is the first step in creating positive and lasting change. If it feels too daunting to speak to a loved one about money, there are plenty of free services out there that are well equipped and ready to help.
2. Make a Plan
Creating financial goals and a strategy to deal with the repercussions of financial illiteracy is an excellent place to start. Making a plan and breaking it down into actionable steps puts you back in the driving seat of your personal finances. There’s something so satisfying about reaching a goal and ticking it off the list. This in turn helps you feel a sense of achievement and personal progress.
3. Learn
Knowledge is power and when you apply it big shifts begin to happen. Absorbing as much information as possible about money management, how it works and how to make it work for you is a key part of overcoming financial difficulty. Whether books, online courses or podcasts are your thing there’s financial literacy aplenty out there now for everyone. When we work on challenging our beliefs around money we are able to transform our mind-set and our situation. We may not have had a say in what we learnt about at school, but we most certainly have control over what we feed our minds with now. See this as an opportunity to take back control and change the narrative.
Punk Money views financial literacy as a social objective and we’re hell-bent on putting a stop to the damaging constructs that got us in this mess. On a personal note we’d like to boldly declare that the system that’s been rigged in favour of the elite is about to crumble. The people are going to take back control of their finances, make empowered choices and no longer be slaves to the system. We can’t wait to see you make it happen.
Thank you for reading.
