Short-term lender Wonga recently asked over 1 000 of its customers about their attitudes towards money.
It found that, despite 88 percent believing that financial health was “extremely important”, most (66 percent) claimed to have only an amateur knowledge of money management.
“Financial literacy is key to financial health. It can help people to manage their money better, to ensure that they prioritise their spending where it's needed most. It also helps them to avoid the burden of bad or unmanageable debt and safeguard themselves against risks to their financial security,” says James Williams, the head of marketing at Wonga.
Williams says the basic pillars of financial literacy can help you to take control of your finances and avoid poverty traps in a number of ways.
Saving. Having money in a savings account often serves as a protective barrier, insulating you against the risks of cash flow issues. Experts recommend that you have access to an emergency fund consisting of at least three to five months’ worth of income in case life throws you a curve ball. This will ensure that you can pay rent and put food on the table if, for example, you lose your job or are in an accident.
Saving also helps achieve the goals that contribute to ongoing financial well-being, such as starting a business, sending children to university, buying property or retiring in comfort.
Debt. Financial literacy helps you to understand the difference between good debt and bad debt, as well as the value of a good credit rating. Debt is often painted in a negative light, but accepting a manageable amount of the right debt can help you to get ahead in life. This could involve taking out a home loan, a student loan or a small business loan, which are examples of good debt, because they can contribute to a stronger financial footing.
Financial literacy can also teach you how to create and maintain a good credit rating so that you can access credit when you need it most. It can teach you the basics of lending with interest and the dangers of taking on too much debt, which can severely affect your financial stability, impair your credit rating and send you down the slippery slope into poverty.
Budgeting. Understanding the benefits of budgeting is a fundamental aspect of savings and debt. Low-income earners often live from hand to mouth, with just enough to get by.
Budgeting provides an extremely useful tool for these individuals, because it will help them to plan their spending so that they don't run out of money, ensuring that they always have enough money to afford essentials such as food and shelter. For those that have a little to spare, it can also help them allocate money towards saving so that they can start to move beyond a hand to mouth existence with some cash in the pocket for emergencies.
If you want to improve your financial literacy, there are free online learning resources available to help you take better care of your money:
* The Money Academy is a learning portal with video lessons and quizzes that teach you about the four pillars of personal finance: debt, saving, budgeting and investing.
* Take charge of your money is a personal finance blog in which creator Brendan Dale shares his debt story and explains how he achieved financial freedom. The blog has a range of articles on topics relating to ditching debt, saving money, making smart financial choices and financial health.
* The Khan Academy provides a comprehensive library of video presentations about personal finance, covering topics from debt and taxes to stocks, bonds and inflation.
* Investopedia is a comprehensive financial dictionary that allows you to search for any financial term or concept, providing a list of relevant answers to enhance your financial knowledge.
* Freakonomics Radio is an award-winning weekly podcast that tackles a vast suite of subjects, including personal finance. It is fun and engaging.