What is Financial Literacy?
Yesterday marked the first day of Financial Literacy Month in Canada; and just a couple of days ago, we posted a quiz to test your financial literacy. But just what is financial literacy? If you didn’t score well on the test, this is something you’re probably wondering. But even if you did score high, you may still be wondering what exactly financial literacy is because there are so many different definitions. And it may largely depend on who you ask.
Typically the term “financial literacy” means the ability to make good choices when managing personal finances – choices that will not lead to financial ruin. But some disagree with this definition, saying that this only speaks to the outcomes of those choices; it doesn’t really measure whether or not a person is more financially literate in some areas than others.
Others still define financial literacy as having an extensive knowledge about investment vehicles such as the stock market, mutual funds, and other investments. Again, judging financial literacy in these terms really only tests your investment literacy.
So again, what is financial literacy? A fairly broad definition (and this one needs to be broad,) is to say that financial literacy is possessing a set of skills and the know-how to make educated decisions on your financial needs, and that you’re aware of the many different financial products that can help you achieve your financial goals.
Breaking that down even further, here are a few of the main things you should educate yourself about if you’re not already aware of them, in order to help you improve your financial literacy.
Know financial products
Your very first one was probably a bank account. Then you may have moved on to RRSPs or RESPs, and maybe even a mortgage. These are just a few, and some of the most common, products that are available. Stocks, mutual funds, and bonds are others. Get familiar with them, and speak to someone about which ones would be best for you.
Know financial concepts
Do you know what compound interest is? Do you know what an investment return is, or how much you should be looking for? Do you understand diversification, housing demand and supply, and such? If not, you need to educate yourself about at least a few of the concepts you think would affect you most. If you’re unsure, you need to speak to someone who can help you decide.
Talk about money
People hate to talk about money. Whether it’s to their spouse, to their boss, or to their financial planner. But if you want to be smart about money, and be financially literate, you need to talk about money to all of these people. Even though it will always be the last thing you want to do.
Make responsible financial choices
This one seems like such common sense, but it needs to be transformed from something you think about, to a lifestyle that you live. Whether you’re a young couple newly married and ready to buy a home, just had a baby, are starting a new job, or heading into your retirement years, you need to be making smart financial choices all the time. This is one of the most important parts of being financially literate.
Don’t let Financial Literacy Month be just another one of those things you occasionally hear about this month. Take the opportunity to make this the month to really do something about your finances, and become financially literate once and for all. Everything after that is so much easier.