What is Financial Literacy and why is it important?


4 March 2023

What is Financial Literacy and why is it important?

In major corporate institutions, the HR and finance departments work together and attempt to create financial harmony for the organization’s assets – its employees. It is the HR professionals who are in the position to partner with the finance function to deliver a direct impact on improving financial literacy among employees at every organizational level.

What Is Financial Literacy? 

Financial literacy is the sense and ability to know and understand the financial resources. While that may be the textbook definition, the reality is, when we talk about financial literacy, we often refer to our ability to leverage finances for our benefits and long term success. A person has to be able to productively use different financial skills – primarily investing, managing your income, etc.

Today, evolved financial resources and products are widespread. Most consumers depend on credit cards, loans, mortgages, etc. for purchasing items. Investments and insurance accounts have found their place in the current scenario, making it crucial for people to understand and use financial resources effectively. 

There are many skills that we’d categorize as a crucial aspect of financial literacy. These include management of wages or household budgeting, paying off debts, evaluation of credit cards and loans, etc. Professionals should have a basic knowledge of financial concepts like compound interests or time value of money. The lack of financial literacy can be lethal for stable and long term financial success. 

Take the Standard & Poor’s Ratings Services Global Financial Literacy Survey. According to it, only 33% of adults worldwide have acceptable levels of financial literacy. In 2017, around 1,101 students were asked about what they thought was the most beneficial high school level course. About 51.4% of students answered “money management” courses would be the most beneficial. 

In America, the Financial Literacy and Education Commission (FLEC) recommends targeted materials and strategies should be employed by programs to underrepresented subgroups in the population. It is necessary to understand the needs of low-income and to produce relevant materials that can help eliminate the problems brought on by poor financial practices. 

Why Financial Literacy Matters

Financial literacy

Have you ever wondered:

  • How many adults can’t afford emergency expenses?
  • Why credit card debts have grown?
  • How many adults don’t have backup plans for retiring?

To help consumers save enough and avoid these challenges, financial literacy is critical. Most millennials, who incidentally make up the largest share of the workforce, are unprepared for a financial crisis. This has been proven in the Covid-19 pandemic. More than half of the workforce lack an emergency plan to cover as much as 6 months of expenses. 

These do seem like individual problems, but they affect the entire population as a whole. The job loss due to COVID and lack of financial literacy have led to a rise in mortgage foreclosures. Financial literacy can also help protect adults from frauds which are, unfortunately, becoming more commonplace. Financial literacy has a broad range of implications for the economy, and improvement in it can lead the way to a global economy.

Trends Making Financial Literacy More Important

There are five trends that demonstrate the importance of making informed and productive decisions about finances: 

1) Complexity

There are various options for investment and saving products. They offer varying interest rates, and different options, forcing a consumer to make a decision they are not adequately informed to make. Complex financial instruments add to the decision making pressure and have an impact on investments in assets education loans etc.

2) Financial environments are changing

The financial environment is now a global market, with many participants and even more factors to influence it. Financial markets tend to exhibit levels of volatility historically unseen. Naturally, retail investors find it difficult to create and implement a financial set path.

3) The number of choices has increased tenfold

There are so many options – brokerage firms, banks, insurance firms, credit unions, credit card companies, financial planners, mortgage companies, and other financial service companies – all vying for assets, creating confusion for the consumer.

4) Retirement plans

In the past, people relied on pensions to support them in their retirement lives. Professionals managed pension funds and put the financial burden on the organizations that sponsored them. The working person did not contribute to his own plan and was almost never made aware of the investments or status held by the pension. They were not involved in decision making.

Today, pensions are rare. Employees are expected to participate in plans and have to make the right financial choices and decide how much to contribute to retirement savings. With the medical world progressing, lifespans are getting longer, and this means that the new generation needs more money for retirement than prior generations.

The primary benefit of financial literacy is that it empowers individuals to make smart financial decisions. By incorporating financial literacy in the workplace, organizations and employees receive, amongst other benefits, increased productivity, and higher retention. Financially literate employees tend to have greater focus and less stress, making them more effective. The Society for Human Resource Management found that an employee’s personal financial issues can lead to an inability to focus at work and higher absenteeism. It has also suggested HR leaders should hire a professional counselor. 

A financial counselor is vital too, and worthy of consideration for key decision-makers in enterprises. Fibe (Formerly EarlySalary) has a stellar track record of powering financial wellness for corporate India, in helping and training the modern workforce for the financial challenges of today, and tomorrow. A few hours of a financial planning program go a long way and deliver visible results in the medium to long term.

The Bottom Line

An improvement in financial literacy will have a positive effect on the consumer themselves, and also motivate them to use financial resources with full knowledge. 

It is not easy to learn how to be financially literate, but once mastered, it can ease life’s burdens tremendously.

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