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9 Reasons Why Financial Literacy is Important

Reasons Why Financial Literacy is Important

It is crucial to enhancing wealth production and attaining economic growth and development. People, governments, and businesses all need to know Why Financial Literacy is Important. The world financial crisis of 2008–2009 “highlighted the importance of financial literacy and capability because the lack of consumer knowledge played a role in the genesis of the crisis,” a World Bank study concluded.

Since that time, developed and developing nations alike have been formulating and putting into action financial literacy and education initiatives aimed at increasing consumer finance understanding.

According to the Organization for Economic Co-operation and Development (OECD), a group of wealthy nations, 59 nations worldwide now pursue coordinated national policies to raise financial literacy. To assist with such measures, the OECD has also released a policy guide. However, promoting financial literacy is not just a national initiative.

On a personal level, Warren Buffett, an American businessman regarded as one of the world’s most successful investors, has highlighted that “the most important investment you can make is in yourself.” Additionally, the availability of resources for financial education has significantly increased (books, podcasts, videos, blogs).

Some Significance of Financial Literacy

1. Conscious Decision-Making

Financially literate non-financial professionals can make well-informed judgments that make the most use of their company’s financial resources.

Knowing the return on investment for various ideas would help them choose the most viable, relevant alternatives that would improve the company’s performance as a whole.

Increased effectiveness and improved risk management will follow from this. Additionally, knowing how to build a budget and make financial decisions. It can be helpful when determining whether or not a company needs to be valued or raise capital.

2. People Can Take Charge of Their Finances

Lack of financial self-control can lead to a number of unpleasant outcomes, including increased consumer debt (credit card, mortgage, student, automobile, etc.), a lack of emergency savings, living paycheck to paycheck, and a lack of meaningful investments for the future. That is Why Financial Literacy is Important.

More importantly, these problems affect more than just underdeveloped nations. The amount of consumer debt in the US is increasing, and millions of people lack the emergency funds and retirement savings they need.

Many people are turning to financial education materials to help them regain control of their finances as they become more aware of the devastating consequences of bad planning.

Many people are increasingly taking control of their money and improving their financial health by learning how to build a budget, establish an emergency fund, pay off debt, and consistently save for retirement (among other financial literacy skills).

3. It Can Prevent Huge Mistakes

One Importance of Financial Literacy is it can stop devastating mistakes from happening. While standard IRA contributions cannot be withdrawn until retirement, floating-rate loans may have monthly interest rates that change.

Simple financial decisions can have long-term effects that might cost people money or affect their goals for the future. Financially literate people are less likely to make costly financial blunders.

4. It Prepares People for Emergencies

Prepare them for the unpredictable with financial literacy subjects like saving or emergency preparedness. Even while experiencing a job loss or significant unforeseen expenditure, it is always financially devastating.

A person may lessen the damage by practicing financial literacy beforehand and being prepared for emergencies.

5. It Helps To Be Financially Independent

To be financially independent, one must realize Why Financial Literacy is Important. In order to take control of their own life and stop depending on a paycheck, many people desire to leave the grind and achieve financial independence.

There is no exception in the United Arab Emirates, as Gulf News notes that “many UAE millennials strive to achieve financial freedom by the time they turn 45 or 50.” According to research by the Saudi Arabian Family Council, 33% of Saudi Arabia’s youth work as independent contractors to support themselves.

Building money is necessary to achieve financial freedom, though. The likelihood of achieving financial independence increases with the timing of starting to accumulate money.

To achieve financial independence, you must convert a portion of your income into capital, enterprise, and profit. Then, you must convert a profit into an investment, which will lead to financial independence.

The two elements of wealth building—taking charge of one’s money and investing wisely—have been shown to rely on one’s level of financial literacy.

6. Financial Literacy Brings Confidence

Imagine making a decision that might change your life without having all the facts you need.

People may approach important life decisions with greater confidence if they are equipped with the necessary financial information since they will be less likely to be caught off guard or negatively affected by unanticipated consequences.

7. It Teaches Better Risk Management

The World Bank stated that customers needed to be aware of the numerous types of quickly emerging financial goods and services as well as the hazards connected with them, such as fraud and over-indebtedness, in order to be more engaged and self-assured participants in the financial sector. 

“The importance of consumers’ financial capabilities for the smooth operation of financial markets becomes even more significant as the variety and complexity of financial products and services increases.”

The World Bank basically agrees that educating customers about money matters will help them assess the risk associated with various financial products and help avoid another financial catastrophe.

In a similar vein, financial literacy “allows an individual to be better prepared for specific financial roadblocks, which, in turn, decreases the chances of personal economic distress,” according to the Corporate Finance Institute.

For instance, those who are financially literate have emergency accounts from which they may draw cash to cover unexpected expenses rather than, say, running up credit card debt. Additionally, by joining insurance programs, they have protected their possessions and themselves against certain hazards.

The entire country will also be less porous when such blockages emerge as more people become better at improving their decision-making and managing financial obstacles without entering an economic downturn.

8. It Helps People To Attain Their Objectives

One Importance of Financial Literacy is it helps people to reach their goals. The ability to budget and save money more effectively enables people to make plans that establish expectations, hold them responsible for their financial decisions, and chart a road for accomplishing apparently unattainable goals.

Even if a person’s desire is out of reach financially right now, they may still make plans to improve their chances of realizing it.

9. It Helps in Financial Inclusion

The issue now is that for a long time, financial inclusion was only seen as a supply issue. In other words, offering more financial products to the populace was the best approach to increase financial inclusion.

In response, many GCC nations have made an effort to offer resources that will assist various fintech in creating goods and services for the general public. For instance, the government of the United Arab Emirates established the Fintech Hive, a center for fintech businesses.

The World Bank has understood, however, that in order for individuals to have access to and use these goods and services, there must also be financial inclusion.

Or, in the words of the German Institute for Economic Research, “although the resultant so-called ‘account ownership’ rate, i.e., the proportion of the adult population which holds an account, still dominates the argument, it is evident that ownership is not sufficient.

Of course, ownership matters, particularly if it is expensive (creating an account is expensive in the strictest sense), but there are two more degrees of financial inclusion beyond the fundamental one. Utilizing an account actively represents the second, intermediate degree of financial inclusion.

The Institute states that in order to achieve these two more degrees of financial inclusion, “the demand side of financial markets” must be improved.

Top Books About Financial Independence

Your money management can be improved by reading books on personal finance. Learning the basics of personal finance, such as why paying yourself first pays off and how to manage and pay off debt, will help you realize Why Financial Literacy is Important.

Here are some books about financial independence:

  • The Total Money Makeover by Dave Ramsey.
  • Playing with FIRE by Scott Rieckens.
  • The One-Page Financial Plan by Carl Richards.
  • I Will Teach You To Be Rich by Ramit Sethi.
  • The Little Book That Beats The Market by Joel Greenblatt.
  • The 4-Hour Workweek by Tim Ferriss.
  • Rich Dad Poor Dad by Robert Kiyosaki.
  • Your Money or Your Life by Vicki Robin & Joe Dominguez.
  • Money: Master The Game by Tony Robbins.
  • The Simple Path to Wealth by JL Collins.


Q: How to be financially literate?

A: You need to learn some financial skills first. The steps are:

  • Create a Budget.
  • Pay Yourself First (saving goals).
  • Pay Bills Promptly.
  • Get Your Credit Report.
  • Check Your Credit Score.
  • Manage Debts.
  • Invest in Your Future.

Q: What are the Main Principles of Financial Literacy?

A: The basic tenets of financial literacy are five. The main objective of financial literacy is to teach people how to earn, spend, save, borrow, and protect their money, even though alternative models may mention other crucial elements.

Q: What are the consequences of not being financially literate?

A: Consequences can be severe, like not having enough savings for the future, being drowned in debts, poor credit, bankruptcy, housing foreclosure, and much more.

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