5 levels of financial literacy
According to Forbes, 40% of Americans consult family, friends or coworkers when anything related to finance pops up in their lives. It points towards the fact that individuals often lack financial literacy. This can have serious implications if proper guidance is not available to handle the details involved in such matters. Having a basic knowledge of loans, debts, mortgages, interest rates, insurance can empower an individual to make the right choices at the right time which saves them from future financial and psychological challenges.
Here is a 5-Level Financial Literacy brief that covers the basic to advanced knowledge of finance required for daily life. For a detailed comparison of various credit cards and banks available near you please visit Myfin.
Level One
Functional Finance- The Essential-to-Know Finance
Individuals often come across terms like debit, credit, profit, and tax in their monthly bank statements seen online or during visits to their banks.
When an account holder takes money out of an account it is called debit, while credit is when money is added to the account. Profit is a financial gain, that is when cash or any asset value (anything you own) increases. Tax is imposed by tax collection bodies and it is mandatory to pay it on time. Assets are resources that have an economic value attached to them. Liabilities are what you owe someone.
Level Two
Basic Finance- The Should-Know Finance
The 5 basic core competencies of finance are what an individual should know beyond the essential terminology mentioned above. These are Earning, Saving & Investing, Spending, Borrowing, and Protecting. Earning is the money one brings home to spend on what one wishes; it could be through a paid job, self-employment earnings or returns on any investment. Saving and investing refers to growing your money through savings and then putting that money with financial institutions and other services where the money would grow. Spending is how you use the money to fulfill the needs in your life. Borrowing refers to acquiring a loan to finance certain goals such as education. Protecting usually refers to insurance, retirement plans. It is a risk management tool for unforeseeable future events.
Level Three
Intermediate Finance- The Better-to-Know Finance:
Better to know than be sorry later. Some financial aspects are highly important to understand because the current choices impact the future. Interest is one of the key concepts. Interest is the money one has to pay because of a loan one acquired. Interest is a rate that is applied on the loan and is added to the loan repayment. It is essential to know the interest before taking a loan. A Mortgage is a type of loan between an individual and a financial institution that enables the borrower to purchase an asset. The borrower’s asset is the collateral that can be seized by the bank/financial institution upon failure to repay. Similarly, a lease is to use someone’s asset for an exchange of money paid at regular intervals for a specified period.
Level Four
Proficient Finance- The Good-to-Know Finance:
It is always good to know the present scenario and predict the future based on a logical approach. For finance, one term that resonates with the statement is inflation. Inflation is a general increase in prices of common use commodities; this translates into decreasing purchasing power. Another important concept is of compounding interest. Compounding interest is a payment charged on previous payment plus interest amount. For example, a 2-year 2% compounding interest on a loan of $100 is equal to $104.04 at the end of the second year. 2% on 100 for year one, that is 102. Then 2% on 102 for the second year makes the total amount $104.04 payable. Payable is what one has to pay out at the end of a term. The value of assets declines over time, which is accounted for as depreciation.
Level Five
Expert Finance- The Know-it-all Finance:
One of the core concepts in finance is Time Value of Money, TVM. It states money has time value attached. Present value, future value, number of years invested in for and interest rate play a crucial role in determining the value of money. Companies, celebrities come with net worth values. Net worth is the value of everything one owns, tangible and intangible minus all the liabilities one owes. For example, the net worth of Jeff Bezos, CEO of Amazon, is $197.9 billion, the net worth of Elon Musk is $184.3 billion. This means Jeff Bezos has assets worth $197.9 billion. Any individual can buy stocks in the stock market. Stocks are ownership certificates of a company; it is a type of investment. Stocks can be bought and sold in stock markets such as the New York Stock Exchange.
Conclusion
62% of Americans have credit card debts, two in three American families lack emergency funds, three in five Americans do not budget. This calls for a financial literacy emergency. No matter what profession or age group or gender one associates with, financial literacy is crucial. Not just limited to terminologies only but one has to be able to manage day-to-day finances accurately and safely.
