Financial Literacy: Introduction | Financial Literacy for Class 6 PDF Download

Introduction

• According to the Financial Industry Regulatory Authority (FINRA), about 66% of the American population is considered financially illiterate.
• Being financially literate allows an individual to be better prepared for specific financial roadblocks, which, in turn, decreases the chances of personal economic distress.
• Achieving financial literacy is crucial in today’s society due to everyday facets of life, such as student loans, mortgages, credit cards, investments, and health insurance.

Fundamental Components of Financial Literacy

Below are the fundamental components of financial literacy that should be learned.

1. Budgeting

• In budgeting, there are four main uses for money that determine a budget: spending, investing, saving, and giving away.
• Creating the right balance throughout the primary uses of money allows individuals to better allocate their income, resulting in financial security and prosperity.
• In general, a budget should be composed in a way that pays off all existing debt while leaving money aside for saving and making beneficial investments.

2. Investing

• To become financially literate, an individual must learn about key components in regards to investing. Some of the components that should be learned to ensure favorable investments are interest rates, price levels, diversification, risk mitigation, and indexes.
• Learning about crucial investment components allows individuals to make smarter financial decisions that may result in an increased inflow of income.

3. Borrowing

• In most cases, almost every individual is required to borrow money at one point in their life. To ensure borrowing is done effectively, an understanding of interest rates, compound interest, time value of money, payment periods, and loan structure is crucial.
• If the criteria above are understood sufficiently, an individual’s financial literacy will increase, which will provide practical borrowing guidelines and reduce long-term financial stress.

4. Taxation

• Gaining knowledge about the different forms of taxation and how they impact an individual’s net income is crucial for obtaining financial literacy. Whether it be employment, investment, rental, inheritance, or unexpected, each source of income is taxed differently.
• Awareness of the different income tax rates permits economic stability and increases financial performance through income management.

5. Personal Financial Management

• The most important criteria, personal financial management, includes an entire mix of all of the components listed above.
• Financial security is ensured by balancing the mix of financial components above to solidify and increase investments and savings while reducing borrowing and debt.
• Achieving an in-depth knowledge of the financial components discussed above guarantees an increase in an individual’s financial literacy.

Importance of Financial Literacy

Listed below are some real-world facts that should emphasize the overall importance of attaining financial literacy.

• It is estimated that about 78% of Americans live paycheck to paycheck.
• More than 189 million of the American population own credit cards.
• On average, credit card owners own about four cards each.
• Student loan debt is about $1.5 trillion for more than 44 million borrowers.
• Credit card debt levels are at a record high of $1.04 trillion.
• Overall, Americans are approximately $12.58 trillion in debt.

The statistics depicted above should illuminate why financial literacy is paramount in today’s financial climate.