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Profitus news Financial Literacy: The Basics and Why It Matters

2024-01-17 13:00:00


Financial Literacy: The Basics and Why It Matters

Financial literacy is a phrase that we hear more and more often in the public sphere. And not without reason: this is an especially important thing for everyone, both young and old, who wants to secure their financial well-being. Financial literacy can, and even must, be equated with computer literacy - without knowing the basics of these areas, we will not be able to manage and apply them in our daily life, or even make it easier. Financial literacy is important not only because of its positive impact on personal well-being, but also on the well-being of the entire country. It allows people to effectively manage their money, invest, borrow, protect themselves from risks, and thus achieve big financial goals that help ensure a better future and the development of common prosperity. But let's talk about everything from the beginning.

What is financial literacy?

Financial literacy is knowledge about financial management: saving, investing, credit, insurance and other financial aspects. It can even be called a skill that everyone, both adults and children, should develop in modern society. Financial literacy makes it possible to manage your finances more easily, plan a budget, correctly assess income, expenses and risks, prepare for possible financial difficulties and even deal with them, achieve financial goals, reduce debts or stabilize your financial situation. This skill is important not only for adults, but also for children, because by learning financial literacy, children not only gain knowledge about how money works, how it can be earned, planned, and saved, but also helps to create a conscious approach to money management, setting priorities, financial responsibility and discipline.


What is financial literacy?


The benefits of financial literacy

First of all, conscious financial management helps to achieve set financial goals: reduce expenses, save for a larger purchase, invest, etc. Another very important aspect is the recognition of attempts to defraud money. In the fast-changing and evolving financial world, there are always scams. You have probably come across them in one way or another. Financial literacy teaches not only how to manage your money, but also how to protect it from people who want to profit. Financial literacy is really important for everyone who works: both for freelancers, whose income often fluctuates and financial planning is extremely important; as well as for employees working under an employment contract who want to enjoy financial freedom. Financial literacy is an inseparable part of some fields, such as marketing, trade, production, marketing, personnel management. In addition, this knowledge and developed skills teach discipline, discipline, awareness, responsibility, appropriate decision-making and other areas.

Basics of financial literacy

Everyone deals with money almost every day: wages, purchases, savings, investments, etc. In order to be able to use this unfortunately limited resource in the most effective way, it is very important to know the basics of financial literacy, which includes daily money management, investing, credit, insurance, saving and other aspects. A financially literate society is a society that is able to properly manage finances, which allows to reduce poverty, increase financial independence and improve the general economic situation of the entire country. In order for a person to be financially literate, it is very important to understand how it works and to know the most important basics of it.

Financial goals

We all probably have financial goals: buying a home, a car, preparing for retirement, investing in children's education, or simply having savings for emergencies. It is very important to properly set your personal and family financial goals, define them, if there are several - set priorities, assess the current situation, make a specific plan for achieving goals, determine future actions, consider possible surprises and be disciplined. Financial goals are much easier to achieve when there is clarity in the process.

Budget and cost management

Budgeting, or budget management, is an essential part of financial literacy and personal financial management. It is the ability of every person to properly control his income and expenses, to distribute and plan them correctly. Both income and expense planning can help you understand your real personal financial situation, logically evaluate potential or existing financial obligations, identify sources of income, and predict and control potential expenses.


Saving is probably the branch of financial literacy that most people practice. However, although we are taught to save since childhood, we do not always do it wisely. Smart saving is the kind of saving when we are able to set aside part of our income for a specific purpose without compromising our daily well-being. People often complain about not being able to save. This is most often caused by an inappropriate savings plan. Discipline, purposefulness and proper distribution of income are very important in saving. Savings help people feel more secure, prepared in advance for immediate needs in case of difficulties: illness, job loss, disaster, etc. So it can be said that financial literacy brings not only clarity, but also security to the management of personal finances.


Financial literacy helps a person to invest his money in a meaningful way. Investing is a way to protect your capital from depreciation, increase it, create an additional source of money and even improve your financial well-being in the future. Financial literacy teaches how and where to invest, what are the possible risks and how to avoid them, what investment method and strategy to choose, how to properly assess the risk-profit ratio. An investment calculator will help those who want to invest, which can be used to calculate how much it is possible to earn after investing a specific amount.

Preparing for old age

Another basis of financial literacy is preparing for old age. Statistical data show that today every third Lithuanian does not save for pension. Consequently, these people will not be guaranteed a dignified life in retirement. Financially literate people prepare responsibly for this stage of life. It is especially important to know the difference between stages I, II and III of pension savings, what is the best way to prepare for old age and why you should care about saving for retirement in general. Knowledge and the right decisions can ensure a truly great and abundant old age.


In addition to the aspects already mentioned, financial literacy also includes borrowing. Credits are a very important tool for those who want to make larger purchases. It is very important to properly assess the situation, understand the terms of borrowing, interest rates, and possible risks. Only by understanding your financial situation, weighing all options and contingencies, will the loan taken out not become a burden and not impair the quality of your daily life.

Other aspects of financial literacy

Financial literacy helps to understand and avoid various risks, unknowns, uncertainty. By understanding the basic principles of insurance and risk management strategies, we can protect ourselves and our assets from unexpected events. Financial literacy helps to understand and evaluate taxes, postpone and plan the portion of income allocated to them, prepare for various life tests, reduce contributions and thus save.

Learning financial literacy

Financial literacy gives adults the skills to properly and effectively manage their own and their family's finances: plan expenses, make larger purchases, prepare for or avoid unexpected financial difficulties, and even invest. We deal with finances every day, so learning financial literacy is really important. This can be done both independently and by attending professionally prepared courses or training.

When to start learning financial literacy?

Now. We encourage you not to wait for anything and start looking into it today. It doesn't matter how old you are, it's a skill that helps young and old alike. The sooner and better you understand how money works in a broad sense, the easier it will be to manage your finances, plan expenses, make bigger purchases, and maybe even invest and earn even more! Also, don't forget about your children when learning financial literacy - the earlier you start developing these skills, the better you will prepare your little ones for the future.

Financial literacy for children

Financial literacy is a very important skill for every person, even a small one. Let's face it, money is an integral part of everyday life not only for adults, but also for children: from an early age we teach them to buy, save, we try to introduce conscious use of money - in other words, we teach them financial literacy.

Knowledge of financial literacy helps children to understand the value of money, its conscious use, to make appropriate financial decisions and responsibility, helps to prepare for future possible financial challenges, deal with them or even avoid them.

Unfortunately, schools still do not teach this, so this responsibility falls on parents. Teaching your children should not be limited to savings, thoughtful purchases and responsible behavior with money. Below we give you some tips on how you can develop children's financial literacy at home.

  1. Budgeting training is one of the first steps towards financial literacy. It gives children knowledge about income and expenses, allows them to better identify it, understand how they can be better distributed, saved or even invested. This knowledge helps to develop financial awareness and helps to manage money better.
  2. Saving is not just money in the piggy bank, it is the realization that this tool can help you achieve bigger goals. Saving helps you learn to achieve your goals in small steps, patience, responsibility, consistency, discipline. This is a very important skill that helps build financial security in the future.
  3. After learning to separate income from expenses, save or even invest (you can even come up with an investment game for children: offer them to invest in some purchase and pay interest over an agreed period), it is very important to develop planning and prioritization skills. This allows children to distinguish necessary expenses, necessary needs from wishes, learn to spend money wisely and make other financial decisions.
  4. Conscious consumption is another area that needs to be discussed with children. In other words, it is the realization that money is a limited resource, so you should choose responsibly how to spend, plan or save it. Conscious consumption develops independence, helps avoid emotional purchases, logically evaluate options and make appropriate financial decisions.


Financial literacy for children


How to test your financial literacy?

  • Wondering how financially literate you are? Is your financial management effective? A financial literacy test can help you find out: answer the 9 questions below and find out where you can improve your skills.
  • Do you track your income and expenses? Tracking income and expenses is the first step to financial literacy. It can be recording both income and expenses in a notebook, on a computer, or keeping a close eye on them in a bank account or other space.
  • Do you plan your budget? For example, when you go to the store, do you predict how much you can spend on that visit, what you will buy, whether you plan for higher monthly / annual expenses, etc.
  • Do you have savings and do you put them aside regularly? In order to save effectively, you need to predict how much of your monthly/semiannual/yearly income you will allocate to savings, where you will keep it and to whom you will allocate it.
  • Are you thinking about retirement? You've probably heard more than once about pension savings. But do you know what it really is? Have you already started saving for retirement, or are you planning to do so?
  • What are your financial goals? Do you have any? It can be an effort to save the available budget, increase it, invest or something else. Financial goals must be specific, clear and tightly defined.
  • Are your savings bringing you profit? Financial literacy teaches you how to employ your existing savings and thus create not only an additional source of income, but also a guarantor of your financial situation in the future. This is a great way not only to save, but also to increase your capital.
  • Are you able to make sound financial services decisions? That is, do you know everything about loans, credit, insurance, can you easily make related decisions, ensure regular payment, etc.?
  • Do you pay your taxes and other bills on time? Financially literate people not only know how to allocate their finances to various contributions, but also know how to save from it.
  • When you visit a store or a place of service, are you not guided by your emotions? In today's society, emotional shopping is very rampant - it is the purchase of things or services not because you really need them, but because you spontaneously decided to do so. You've probably noticed that when you go to the grocery store when you're hungry, you spend more. This is where the consequence of emotional buying lies - our emotions dictate that we are hungry and need lots and all kinds of food. It is for this reason that specialists agree that it is good to plan even the smallest purchases - not only will you not buy unnecessary goods, but you will also save money.


How to test your financial literacy?


Level of financial literacy in Lithuania

It is disappointing, but the conducted studies show that the level of financial literacy in Lithuania is really low - we are the last among the 24 European Union countries studied. Lithuanians lack investment, knowledge of more complex financial solutions, understanding of how to earn from savings. This knowledge is lacking from an early age: schools teach children computer literacy, but not financial literacy, even though it is an equally important area. Employers very often require knowledge of computer literacy, so the situation is a bit better here. And this is what you will do and how you will use the money you earn, how you will distribute it and what you can do to avoid a financial crisis, in other words, what is your financial literacy, which can lead not only to your well-being, but also to the well-being of the whole country, unfortunately, it is not yet important

Financial literacy in other countries

Coincidence or not, but the greatest knowledge of financial literacy is found in countries with a good financial situation. The Finns, who have mastered the secret of a happy life, are on the list of global leaders in financial literacy. Canadians, Danes, Swedes, Norwegians and even our neighbors Estonia, where financial literacy is integrated into the curriculum, are also on the leaderboard. In these countries, the topic of financial management occupies an indisputably high position, therefore, clear conditions have been created for it, and every year it moves purposefully towards the set goal.

However, there are countries where financial literacy is extremely poor. Residents of Africa, some of Asia and Latin America have even lower financial literacy and face even greater challenges in managing their personal finances than Lithuania. However, financial literacy is a learned skill, so the situation can change at any time and the least financially literate country can climb to the heights of the most literate.