The Effects Of Financial Literacy

Literacy is defined as how well a person knows (and understands) a certain field or industry. A financial literate person is someone who is well educated about finance and its intricacies. The more financially literate you are, the better your chances are of achieving financial freedom. Did you know that the main purpose of Leofinance is helping people achieve financial freedom?

Up until recently, financial literacy was mostly a privilege of the few. These are mainly those who were willing (and able) to pay for the expensive nitty gritty cost of acquiring the knowledge and those who were lucky enough to know and associate with the former group. Now, its way easier and cheaper to acquire the knowledge, the hard part is to understand and implement it. Knowledge is power only when you utilize it.

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There are numerous effects of financial literacy like been able to achieve financial freedom in less time than a financially illiterate person, live a financially comfortable life (financial stability), prevent certain financial losses etc. I decided to group them into two main points; less headaches and more options.

Less Financial Headaches

Financial headaches are often compared to toothaches, the more you ignore the problem the worse it gets. Headaches are inevitable and part of the process but when you can’t solve it on the onset, can inflict more damages to a person’s finances over time.

For example, You own company Y and got a financial lawsuit from company X (a competitor) for stealing and using their patent. Let’s say that this is not true but you also don’t have enough funds to pay for a good lawyer to help you finesse your way out of it. So you end up losing the case and your company gets taken away from you.

In this case, the problem is lack of affordability (not enough funds) but sometimes it can be merely a lack of knowledge. For example, when starting a business you open a sole proprietorship or general partnership instead of an LLC or corporation. In a corporation, losses stop at the company level and don’t affect you at the personal level. That’s not the case on a sole proprietorship.

There are many potholes in the world of finance. One of the main effects of being financially literate is that it will help in preventing you from stumbling into these potholes which naturally reduces the amount of financial headaches. The less financial headaches there is, the more financially healthy you become!

More Options

Another prominent effect of financial literacy is that not only do you know that you have more options but you also tend to know how to navigate through them. This can be of immense benefit in accelerating a person’s financial journey.

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It’s like a person who lives on an island for most of his/her life and thinks that the world is small and there are few ways to go about things. But then, he or she gets exposed to the wider world and the person suddenly realizes that the world is way bigger than they can fathom and there are many avenues and paths to explore. Financial literacy brings a similar realization, this one happens in the financial world.

More options can also mean not settling for less, unable to be fooled by so called financial experts or financial scammers, not being harassed by financial bullies (for example, tax collectors) etc. The idea is that a financially literate person just can’t be ‘boxed in’ because they can always find a way out.

A Paradox

Robert Kiyosaki in his classic rich dad book series said “there are two kinds of money problems, too much money and too little money”. Having too much money can cause some serious financial headaches which is kind of contrary to what I mentioned above (less headaches).

One way to reconcile this is by explaining that there are good and bad effects to almost everything. A good effect of financial literacy is that the knowledge you know can help you from not experiencing certain types of financial headaches but on the flip side that same knowledge will exposed you to other types of financial headaches.

Its like a coin that gets flipped from head to tail. It's still the same coin but with another side on the top. In this post, I just kept the focus on the positive effects of financial literacy.

What do you think about the effects of financial literacy? Is being financially literate part of your financial goals?

Thanks for reading!

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