Untitled

Financial literacy or the lack of it affects us on both the personal and business sides of our lives. The are two levels of financial literacy, the lower level which is involved with the taking care of basic financial necessities such as drawing and maintaining a budget, saving, paying of bills and debts, and understanding the importance of keeping and maintaining a credit score. It is about having the discipline to do the basic financial stuff.

The higher level of financial literacy concerns itself with the attainment of financial freedom through vehicles for wealth creation. It is impossible to be wealthy operating at the lower level of financial literacy.

There are many people today making money on the internet but cannot convert it to wealth simply because they lack financial literacy. Financial literacy or the lack of it affects us on both personal and business side of things. So, those who choose to ignore the importance of acquiring financial literacy are doing so at their own peril. For better or worse, money touches all areas of life. Financial literacy can help.

What is Financial Literacy?

Financial literacy is the foundation upon which wealth creation can be build. Everyone can make money but very few can create wealth even when they have the opportunity to do so. A lot of people are able to make money either through salaries and talent through sports, arts and entertainment, etc. Many of those people are not able to manage the huge sums of money they receive because of their lack of basic financial literacy. I am sure you know of many people in sports and entertainment industries who amassed huge amounts of money and only to lose it all afterwards. Those are typical examples of why financial literacy is so important.

At a very lower level, Financial Literacy is the ability to understand the importance of saving for the future, the importance of maintaining a good credit record and manage personal finances which include:

Budget: The purpose of a budget is to enable you to realize you most cherished desires by defending them from your casual wishes. It helps to reinforce discipline as it forces you to live within your means. Budgeting helps to avoid impulsive spending.

Debt management: Proper debt management is the basis for healthy budgeting that stems from good discipline. Do not commit to debt simply because you can afford it. If need be and provided you can afford it, use it reasonably to acquire income generating assets. This way you will be leveraging your way to wealth creation. Be wise with your spending on credit. Deal with over-indebtedness harshly as soon as possible.  

At a higher level, Financial Literacy involves the ability to read, understand and interpret financial statements and economic trends. This ability allows one to identify strengths and weaknesses of any business entity and spot opportunities for investment. It also guides one’s quest for building and expanding their portfolio of income generating assets. Financial Literacy assists in the control and evaluation of financial decision-making activities.

Why financial literacy is so important?

We do not all have to be financial gurus but must all have the basic understanding of what the concept of financial literacy entail because the financially illiterate are vulnerable to the financial abuse by others. Financial enlightenment is a beam of light that exposes financial pitfalls and scams, highlights opportunities and empowers you to make sound financial decisions. This is one of the reasons why financial literacy is so important and has become more relevant in this day and age. Financially literate people are not easily bluffed as they can spot a fluke a mile away.

The good news is that financial literacy is a skill that anyone can acquire. We may differ at the levels of understanding but must all have some level of understanding. Financial literacy has a mixed of understanding for the basics of finance, accounting and economics. Marshall, MacManus and Viele interestingly define accounting as “the process of identifying, measuring, and communicating economic information about an organization for the purpose of making decisions and informed judgments”

At a higher level of financial literacy we understand that financial statements give an indication of how financially healthy your business or the business you intend investing in may be at a given point in time. The secret to determining whether a company is financially healthy is in analyzing its financial performance over several periods to determine trends. Trends paint the true picture behind every entity. Businesses that are facing financial problems will have a downward sloping trend line that shows a performance that is less than the current economic conditions would indicate. Financially healthy companies will have an upward sloping trend.

We all want to attain a healthy financial status – not necessarily becoming wealthy even though we can be but to be financially sound. Financial health is a result of acquisition, retention and growth of financial assets. This is status is almost impossible without financial literacy. Financial literacy at a higher level is what every aspiring investor, entrepreneur or small business owner must acquire, keep, and protect with everything they’ve got. Their personal and business success depends on it.

We may not all be business owners and we don’t have to be but can all be investors and in investing we need financial literacy at a higher level. Your acquired financial skills will help you navigate the maize field of investment options and propel you to reach your financial goals quickly. Be careful to make informed investment decisions.

 About the Author

Basi Malatji (JB)