Financial Education | What it is And Why Incorporate it Into Your Life

During recent years, financial education has become a topic of great relevance for people. It is clear, today's world presents countless financial decisions that directly impact people's quality of life . In this article, we invite you to explore in detail this term, its usefulness, importance and how you can incorporate it.

So, prepare yourself and take note because the information you will find in the following lines could be of great help for your finances.

What is financial education?

To begin, we must talk about the concept of financial education, a term that can be broad. However, it could be defined as a set of knowledge and skills that allow us to understand and manage economic resources . This, in general, involves understanding how money works, how it is generated, how it should be spent and invested.

In addition to the above, financial education encompasses people's ability to plan long-term with their resources. For example, the preparation that they can do to anticipate financial emergencies that may occur. Also, it includes making informed decisions about investments and expenses.

Regarding the origins of this name, it is possible to say that it emerged in 2003 thanks to the Organization for Economic Cooperation and Development (OECD) . The organization prepared a document with common principles and recommendations for financial education, published in 2005 .

According to this, the objective of financial education is to provide people with a series of practical and theoretical tools in managing their finances. Consumers or financial investors, through this, can improve their knowledge about products, concepts and financial risks . In turn, this ensures good money management.

Just to cite one piece of information, according to the Intrum European Consumer Payments Report of 2022 , 76% of Spaniards claim to have received a good financial education . However, at the European level, this figure is not very positive, since Spain only surpasses Italy, Poland, Lithuania and Hungary. The above indicates that there is still much to work on in this area.

What is financial education useful for you?

As already mentioned, financial education is a powerful tool to train people to control personal finances. This allows you to develop a proactive approach to money, mitigating or avoiding the anxiety and stress of financial difficulties . In addition, it makes it easier to make decisions, such as purchasing a house or planning for retirement.

In general, learning financial education turns out to be essential to maintain order and maintain economic stability. Below, we present some aspects that reflect the usefulness of this type of personal resource management:

1. Make informed decisions

It is clear, making financial decisions involves a large series of aspects such as the evaluation of risks and rewards. In that case, financial education, as already stated, enables people to make informed decisions and evaluate investment options . Financially educated people will be better equipped for these determinations.

2. Understanding and controlling personal finances

Of course, those with financial education have a better understanding of everything related to their finances. From creating a budget to managing debt and planning investments . By understanding these fundamentals, people can take greater control of their finances and thus make better decisions.

3. Build a better financial future

In financial education, planning is key, since people's economic future largely depends on it. This is not an issue that is only related to surviving today, but rather to building a sustainable future. The above implies understanding the importance of saving, planning and managing long-term investments.

4. Anticipate any contingency

No one is exempt from some surprise in their life, in this case, one that can have a negative impact on personal finances. For this reason, financial education is also responsible for planning any contingency and this can be thanks to an emergency fund . This type of preparation can make a big difference in times of crisis.

5. Avoid falling into financial traps

Finally, it is known that in the world of finance there are all kinds of investment opportunities and similar products. However, not all of them have the same utility, nor are they made for the same needs. It is at that moment when financial education appears as a shield against the possible traps associated with risks to personal finances.

The above were five reasons that indicate the main functions or benefits of financial education. As you see, everything is focused on information, data and guaranteeing the security of people's resources.

What is the importance of financial education and why incorporate it into your life?

The previous points give some clues about why financial education is important for everyone. In general, this lies in its ability to empower and make consumers more aware of their decisions . Incorporating it implies taking the reins of economic resources, instead of allowing them to take control and disturb the tranquility.

Financial education, as you have already seen, provides the necessary tools to, for example, avoid unnecessary debt. Additionally, it increases people's ability to plan realistic financial goals and build a strong financial future . In general, the main objective is to learn to properly manage resources.

Why should you incorporate financial education into your life? Well, this type of training will give you the tools to avoid, for example, impulsive decisions. With this, you can ensure that every choice or decision you make related to your finances is backed by a solid understanding of the pros and cons of each situation.

Another important point is that financial education can help you make highly beneficial strategic decisions. As which? Thanks to understanding this type of information, you will clearly know what compound interest, investment diversification and risk management are . You can take this to your advantage to take care of your assets and even increase it.

Effective debt management is also part of the relevance of financial education. Finally, its incorporation not only benefits at an individual level, but also contributes to global economic well-being . Clearly, financially educated individuals are likely to make decisions that foster economic stability and growth.

How to have financial education?

Following the line of what it is, what it is for and what its importance is, it is time to talk about how to have it. There are certain steps or actions that you should include if your desire is to have a good training in finance . Below, we present some practices that you could incorporate into your daily life:

Incorporate the fundamentals first

As in any type of study or routine, the first thing you should do is incorporate the fundamentals of financial education. For this reason, it is key that you familiarize yourself with the simplest terms such as budgeting, saving, investing and debt. Understanding these basic principles will be a great starting point to move on to more advanced topics.

Read and research

If you want to acquire a good financial education, you must get used to reading a lot on the subject. This is a powerful tool to acquire financial knowledge and you have it at hand in books, blogs and also specialized articles . It is worth recommending that you update yourself from time to time on financial trends and practices.

Make an evaluation of your situation

Now, after understanding the most basic terms and understanding some more complex ones, it is time to evaluate your current financial situation. For this, you must evaluate everything related to income, expenses, debts and assets . This is an initial step that will tell you what you need to continue doing or what there is to improve.

Set your financial goals

Once you take stock of everything related to your current financial situation, it is time to establish clear goals. Define what your purposes are and make sure they are realistic in the short, medium and long term . This will give a direction to your project and a direction to all the measures you will take in economic matters.

Make a budget

A relevant action is to create a budget. What should this reflect? It must include everything related to your income and expenses, so it is necessary that you make an exhaustive count of these . This way, you will be able to identify areas for improvement and also control your cash flow.

Invest and save

Of course, to what you learned previously you must add other types of knowledge and then put them into practice. In this case, you need to know everything about different investment options and also savings strategies. Keep in mind that diversification and long-term planning are vital to financial success.

Manage your debts

To finish these tips on how to have a good financial education, we could not leave debts aside. The main recommendation is that you understand how loans, credit cards and the different financial instruments available work . To this, you must add the implementation of strategies

So, if you want to have a good financial education, it is essential that you follow the steps already described. We don't want to tell you that they are the solution to all your problems, but they are good practices to improve the health of your finances.

Key concepts of financial education

Finally, before going to the conclusions of this article on financial education, we will leave you with some key concepts. This type of training presents a series of fundamental terms that everyone should know. Below are some of the main ones:

Compound interest

Throughout the article it was mentioned several times and this is not a coincidence. Compound interest is that which is accumulated on the initial capital and the interest that has previously been accumulated.

Inflation

Chances are you've heard this term countless times and not with a positive connotation. Simply put, inflation is the general increase in goods and services over time . Thus, real estate prices tend to rise, and the purchasing power of a currency decreases.

Budget

In this case, a budget is a financial plan, which details all the expected income and expenses during a specific period of time . Its purpose is to help control expenses, in addition to prioritizing goals and avoiding unnecessary debt.

Debt

You surely know what it is and at some point you will have had it. What we all know is that a debt is money that is owed to third parties . However, it is essential in financial education to understand how to manage debt, know how interest accumulates and how it affects the budget.

Investment

Another of the concepts that may seem most familiar to you is that of investment. This involves placing money in assets with the objective of obtaining a financial return over time. There are various ways to invest and some of the most common are stocks, bonds, real estate or mutual funds.

Credit score

The credit score is a numerical measure, which evaluates the creditworthiness of a person . Having a good score is key to being able to access loans with favorable interest rates.

Emergency fund

Maybe this term sounds familiar to you and that is normal, since it is a fairly simple concept. An emergency fund is savings that people set aside to cover unforeseen expenses . For example, when there are emergency home repairs, medical expenses or even job loss.

Estate planning

Again, planning is key in the financial education environment and there are even several types. In this case, we are talking about estate planning, which refers to organizing and managing assets and liabilities to guarantee that wealth is effectively transmitted to subsequent generations.

Cost effectiveness

Yes, it is what all people dream of when talking about making some type of investment. Just to remember what it is about, profitability is the financial return obtained after investing or executing some activity . When making financial decisions, it is important that this point be evaluated.

Diversification

Finally, a term that should be very familiar to you if you are thinking of making several investments. Diversification is distributing the assets in your investment portfolio to reduce the risk of loss. This can help mitigate losses if an asset does not perform favorably.

These were 10 concepts that you should be clear about when implementing actions or implementing financial education in your life. With these, you will have a foundation to delve deeper into this interesting world.

Final words

In short, if you want to be one of the examples of financial education in your closest circle, you must train yourself. Of course, as you may have found out, this is not something that only financial experts can access , as it is information that is available to everyone. Incorporating it into your life will be a great investment for your long-term economic well-being.

If you can understand how your money works and how to make informed decisions, you will be prepared to face the different challenges in this area. Financial education is a tool that will represent a guide for solid and safe management of your finances . We hope that this article will be useful to you as you embark on your journey in this universe of numbers.

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