Why Financial Literacy Is Important (Essay Sample)

Why Financial Literacy Is Important
First Name, Second Name, Last Name
Department, University
Class Code, Class Title
Professor’s Name
Date
Why Financial Literacy Is Important
Financial literacy refers to the knowledge necessary to make sound financial decisions. It takes into account the know-how to manage and pay debts, the ability to create and follow budgets, and the understanding of how different financial instruments such as income statements work. Over the years, consumer habits and financial products have changed and evolved rapidly. For instance, people are gradually shifting from using cash to credit cards. Therefore, financial literacy is crucial for three main reasons; consumers now have more financial decisions to make, there is a need to bridge the rapidly growing financial disparity between the rich and the poor, and financial literacy helps build better personal financial management.
First, financial literacy is essential because consumers now have to make more financial decisions compared to the past. For example, in the US, retirement planning is one of the financial areas where people have to shoulder more responsibility to ensure their financial security. A few years ago, people would depend on the companies that hired them and the government to create pension plans for them. However, nowadays, the burden of retirement planning has shifted to individuals since pension plans are proving inadequate and more people are taking up self-employment and freelancing CITATION Lus19 \l 1033 (Lusardi, 2019). Additionally, there are more emerging savings and investment options, such as the rise of crypto-currencies and NFTs. All these changes in financial environments necessitate the need for financial literacy.
Second, financial literacy is important in the effort to bridge the growing disparity between the rich and the poor. An excellent example of the ever-widening gap between the haves and the have-nots is a study by the FINRA Investor Education Foundation. The study found proof of not only existing but growing structural financial disparity; White and Asian adults showed more economic proficiency, whereas Blacks and Hispanics showed lower levels of financial literacy. However, the study also indicated that governments should focus on providing quality financial education to end the economic disparity between groups since financial education positively correlates with behaviors indicating financial capability (Lin et al., 2019).
Lastly, financial literacy is a key component of improving personal financial management. From student loans, credit card loans, and mortgages, quality financial education equips people with the skills to manage their money and debt effectively. For example, budgeting, a key financial education concept, helps individuals create the right balance between saving, investing, and spending. Additionally, financial literacy equips people with knowledge of different financial products, thus enabling them to make effective decisions CITATION Lus19 \l 1033 (Lusardi, 2019). For instance, a person can understand why a 401K plan works better for the