And why does it matter?
Many things in life involve money.
Almost everything.
Want to buy a house?
That costs money.
Want to have a baby?
That costs money too.
Take a holiday?
You’ll spend money.
Visit a friend?
Taking the MRT costs money, too.
Financial Literacy is defined as the ability to make informed decisions about financial planning, wealth accumulation, debt, and retirement spending and withdrawals.
It forms part of our human capital and it improves our economic outcomes beyond formal education.
Put simply, being financially literate is about being smart with money.
And being smart with money leads to having more money.
How do we measure financial literacy?
Financial literacy tests ask you three or five questions.
These questions cover basic financial literacy topics like compound interest, inflation, numeracy, and risk diversification.
Globally, people are not financially literate
Two out of three people worldwide are financially illiterate.
Yes, that’s the majority of people.
Singapore doesn’t fare much better. Only 40% of Singaporeans are financially literate.
Globally, risk diversification is the most poorly understood concept.
Many people think that diversification is just throwing in as many things as possible into your portfolio.
Imagine going to the supermarket and taking one thing from every shelf.
Ridiculous.
A balanced diet is one that includes vegetables, fruit, grains, and meat. But I’m not a nutritionist or dietitian, so don’t quote me on this.
In the same way, your portfolio should have a “balanced diet” of risk exposures. Usually, this involves a mix of equities, bonds, and cash.
Anything else is just a snack and shouldn’t make up a significant part of the portfolio.
The large cost of financial illiteracy
30-40% of retirement wealth inequality is due to financial literacy.
In other words, having less financial literacy will cost you nearly half your retirement.
Financial literacy helps you to avoid high cost, actively managed investments. Instead, you participate in the stock market through broadly diversified, low-cost index funds.
You also use debt wisely instead of wantonly, save prudently, and avoid expensive financial products.
You avoid being scammed as you have realistic expectations of financial returns and you don’t fall for promises that are too good to be true.
You can start by reading this blog
Exposure to educational personal finance content is one of the best ways to gain financial literacy.
This blog is one of the ways through which you can educate yourself and boost your retirement outcomes.
You can also check out my top 3 personal finance books for a more in-depth education in personal finance.
Either way, financial literacy is one of the best investments you can make in your future.
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