In the words of Adam Smith, “[e]very man lives by exchanging.” However, one’s understanding of economic factors plays an important role in deciding whether these exchanges will help one just get by, become rich, or become crippled with copious amounts of debt.
Today, it’s more apparent than ever that one’s level of financial literacy — or understanding of economic decisions and the impacts they make — plays a key role in one’s ability to succeed. But, why? To truly gauge the importance of financial literacy in today’s world, it’s essential to explore the reasons why understanding key economic principles can make or break someone.
Here is why economic understanding matters.
The Economy Is Changing
Like many other aspects of the world, the economy has changed significantly over the past several decades. As a result of this change, many previously popular approaches to building wealth may not have the same successful results today as they would have years ago.
In particular, the job market has become more inundated with professionals than ever before. While some types of professionals may be in demand, others may not. Bearing this information in mind, financial literacy is essential to building wealth in today’s changing world.
To put this into perspective, it can help to explore an example. Imagine a student who lacks financial literacy choosing a college major. They may simply choose something that they enjoy without first researching whether professionals of this nature are being sought out in the job market. Ultimately, this can leave this student crippled with student debt without the opportunity to step into a lucrative job role that is able to support them.
Conversely, a financially literate student would likely first research the job market before choosing a major. In this way, they’ll be able to step into a role in a lucrative industry — such as fintech — that helps them pay their student loans and begin building wealth. Consequently, lacking financial literacy puts one at a disadvantage because one is unable to adjust to a changing economy.
Financial Literacy Allows One To Find Financial Security
When it comes to reaching financial security, there are many factors that one has to consider. Unfortunately, those who lack financial literacy are often unaware of these factors and are, therefore, prone to making financially irresponsible decisions.
Some key factors in this process include the ability to stay debt free and the ability to earn money. If one doesn’t have a proper understanding of economic factors and how to act in beneficial ways, this can make it difficult to reach a state of financial security.
In particular, financial literacy has the power to help one effectively manage one’s money. In essence, this means steering clear of debt and utilizing money in ways that ultimately help one grow their savings. This can include many different tactics such as investing in savings to grow passive income, making decisions that will save one money in the long term, and avoiding unnecessary costs.
To put this into perspective, imagine someone without financial literacy choosing a home. Instead of looking to purchase property, they instead rent an apartment they find because it’s close to their workplace. They do this thinking that it is wise because they’ll save money on gas when, in reality, purchasing a home farther away would ultimately help them build wealth more effectively.
Without a proper understanding of the impact of various financial decisions, those who lack financial literacy are likely to unnecessarily waste copious amounts of money throughout their lifetime. Ultimately, this makes it far more difficult to save money and become financially secure. As such, it’s clear that financial literacy plays a key role in helping individuals make wise monetary decisions and reach a state of financial security.
Economic Understanding Can Increase One’s Quality Of Life
For those without financial literacy, experiencing a high quality of life may seem like an uphill battle. Specifically, their lack of economic understanding may make them think they’re incapable of living their ideal lifestyle when, in reality, they may just be making the wrong decisions.
In today’s world, many younger professionals now crave a flexible lifestyle that allows them to travel and engage in enjoyable pastimes. While this wasn’t easy to pull off several decades ago when full-time, in-person roles were the norm, today, it is well within reach.
In recent years, there has been an explosion in what is called the gig economy. This is an economy in which many freelance and part-time positions are available, making it possible for professionals to have more flexibility in their work lives. As a result of this economic shift, more professionals can now experience a better quality of life by taking advantage of these employment options.
However, those who lack the financial literacy to take advantage of these innovations in the economy may feel stuck in traditional roles. For example, rather than chasing their desire to travel, a professional without financial literacy will think the costs associated with travel are too expensive and they won’t be able to make enough money working part-time.
In reality, they are discounting the amount of money they would save without bills and rent, which makes their point moot.
This example highlights the significant impact that financial literacy can have on one’s quality of life. Specifically, one’s ability to live a lifestyle that makes them happy and allows flexibility rather than feeling tied to antiquated ideas about work.
Financial Literacy Is Key To Thriving In Today’s World
No matter who one is, having a deep and thorough understanding of economic factors is vital for achieving success in today’s world. In addition, those who lack financial literacy run the risk of falling into debt and feeling forced to live a lifestyle they don’t enjoy. Thankfully, financial literacy can be developed by anyone willing to put in the time, make the effort, and start making smart decisions.