Financial illiteracy problems might be more of a threat than we think. If you want a secure financial future, you need to make sure you are adequately educated in handling your personal finances. But what exactly does that mean?
Being financially literate means you have enough common sense to understand how money really works so you can use it to improve your life. It also means you have the right skills that will allow you to manage your finances wisely. Most importantly, it means you are in complete control of your finances and you have the initiative to get to know the options that will maximize your financial resources. Whether it is big or small, you always make sure you make smart decisions all the time.
Your money has a huge role to play in your life. We live in a consumerist society. If you want to live a comfortable lifestyle, you have to learn how to use your money wisely so you can build your net worth. This can be done only if you are financially literate.
Unfortunately, we have huge financial illiteracy problems. According to reports, 2 out of 3 American adults will fail even the most basic financial literacy test.
Not everyone is blessed to have parents who can consciously teach them lessons about money management. And if nobody teaches them anything, they will learn from their mistakes – which can sometimes make life very difficult. If they only learn the right financial lessons at an early age, they do not have to go through so much difficulty in life. They can make the right decisions early on and avoid the mistakes that can compromise their future.
How does financial illiteracy compromise your financial security
There are so many ways that financial illiteracy problems can compromise your financial security. Knowing about each and every one of them might convince you to become financially literate as soon as possible.
Here are the different ways financial illiteracy can endanger your financial future.
You end up in debt
Do not get us wrong. There are several ways to use debt to your advantage – but you have to do it wisely. But that is the thing. If you are financially illiterate, you cannot make wise decisions. You will most likely end up spending beyond your means. Any expense that you make in excess of your income will most likely be paid by debt. If you have the wrong reasons to use debt, it can quickly become too much for you to pay back. That can lead to problems that can restrict your financial capabilities.
You compromise your credit reputation
One of the financial illiteracy problems indicates a lack of understanding about credit reports. If you do not know what affects your score, that can lead to the destruction of your credit reputation. Once your debt becomes too much for you to handle, you can expect that your credit report will be reflecting that. If you start missing out on payments, that can pull your credit score down and eventually destroy your credit reputation. When you have a low credit score, you will be considered a high-risk borrower. That will prompt lenders and creditors to give you a high-interest rate on your loan. This means you have to pay more for the loan you are borrowing.
You miss out on financial opportunities
A lot of people do not understand the power of compound interest. This lack of knowledge means you cannot take advantage of it. If more people understand how this can quickly grow their net worth, they will surely find a way to invest more. Oftentimes, people fail to invest because they do not understand what it all means. While it may admittedly be confusing, there are various ways to simplify your investments.
But the financial opportunities do not stop with investments. There are other financial products that will help make your future more secure. Unless you are aware of these, you might miss out on various opportunities.
You face barriers when growing your net worth
It is hard to accomplish something if you do not understand it. How can you hope to grow your net worth if you are unaware of the full potential of your finances? If you happen to have accumulated a good amount of debt that ended up ruining your credit reputation, you have just erected barriers that can hinder your financial growth. While it will not be impossible to overcome them, it will make it harder for you to improve your net worth.
For instance, buying a new home will help improve your net worth – even if you borrow a mortgage to pay for it. Every payment you make towards it will help increase the equity of your home. But to get approval for a mortgage, you need a good credit score. If you are still approved despite a bad score, you will be given a high-interest on the loan. Not only that, you also need a down payment. This will lower the amount that you have to borrow. If you are financially literate, you will know the right techniques that will lower the debt that you have to get in order to buy a house.
You fail to prepare for the future
If you have financial illiteracy problems, there is a low chance that you are prepared for the future. You will not find the need to save up for an emergency – just like the 44% of Americans who cannot even pay a $400 unexpected expense. And even if you know that you need an emergency fund, you probably do not know how to save up for it. But if you are financially literate, you will know how to save even if you have limited financial resources.
Being prepared for the future goes beyond your emergency fund. You should also start saving for your retirement fund. If you have kids, you can also save up for their college education. This will help get them started on their education without having to end up in debt. All of these will not only make your future secure. It can also help increase your personal net worth.
How to start learning about your finances
If you really want to solve your financial illiteracy problems, it is important for you to learn how to manage your finances. Learning everything you need to know about how money can help improve your life will take some time. There are so many things to learn.
To get you started, you might want to focus on your own personal finances first. Concentrate on understanding the money that is responsible for giving you and your family what you need to survive. As you try to understand your finances, you will slowly realize the different areas that you need to learn. You will realize that you need a budget plan to help you understand your finances.
When you study this budget plan, you will find out the different places that you need to understand. You will notice the entry about your debt payments. You should take a look at that and try to figure out how this is draining your finances unnecessarily. Among the things that you need to look into is the interest rate. How can this affect your finances?
If a debt is involved, your credit report is also affected. The way you handle your debt will determine the status of your credit report – and in effect, your credit score.
Another area that you will notice through your budget plan is your saving goals. This includes your retirement plan and even the down payment for your home. All of these will require your attention and understanding.
Be careful not to overwhelm yourself. Just take the learning one step at a time. Nobody is expecting you to learn everything overnight. Just do your best so you no longer be burdened by financial illiteracy problems.