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.