Do you know that if you have good financial knowledge, it doesn’t mean that you are automatically good in managing money? Financial Planning knowledge does not equate to you being able to do the right thing. In short, knowing about something and taking the right action are 2 different matters.
Many people are still vague about the 2 terms “Financial Literacy” and “Financial Knowledge”, hence they used it interchangeably without realizing that they are not referring to the same thing. In this article, I will explain the main differences between both terms while also shedding light on Financial literacy.
What is Financial Knowledge and Financial Literacy?
Financial Knowledge is defined the understanding of financial definitions and types of financial resources that could range from personal finance to global financial matters.
Examples of financial knowledge are you know that the world is undergoing high inflation period, hence you need to tighten your expenses; You understand the effect of compounding, hence you want to invest and let your money grow over time; You understand how insurance works, thus you seek for coverages that could help you in the event of emergency.
Whereas financial Literacy is defined as a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial wellbeing.
As you can see, financial literacy consist of 4 components and knowledge is just one of them. Examples of financial literacy are you have clearly identified the relationship between you and money; You adhere to the spending plan that you have setup; Through your financial knowledge, you can evaluate and decide on the choices of saving and investment products that are suitable for your different financial goals.
The Importance & Benefits of Increasing Financial Literacy
Below are some facts that were published under Malaysia National Strategy for Financial Literacy 2019 – 2023, conducted by Financial Education Network (FEN):
75% of Malaysians understand about inflation, however only 38% can relate the effect of inflation on their own purchasing power;
43% of Malaysians understand that the growth of money is compounded over time, however 22% believe that money grows on linear basis;
92% of Malaysians are more comfortable having deposit products against having investment products.
Besides, Atkinson & Messy (2012) found that higher financial literacy promotes good behaviour, and it will help to contribute to the growth of country’s economy. Hence, financial literacy doesn’t just benefit individuals, it is also important in developing our nation.
Benefits of being Financially Literate are:
You understand that Money is a Tool and not a Goal;
You can implement effective management of cashflow and debt;
You know the pros and cons for each financial products available in the market;
You can reduce your financial stress and anxiety through making the right choices;
You will be confident when making financial decisions.
What Does It Mean to Be Financial Literate?
When you are Financially Literate, you will have the necessary awareness, knowledge, and skills to consider the pros and cons of each financial choices that you have. Then, you will have the right attitude and behaviour to decide the better choice and to build towards the life that you want to have.
Some examples of Financial Literacy in action are:
You understand that money needs to be managed, hence you keep track of it and ensure that it follows your spending plan while reviewing it when necessary;
Allocate additional money to your goals whenever you receive bonus or have extra savings;
Setup an emergency fund worth 6 to 12 months of your income or expenses and not use it for any other purposes;
Invest responsibly and have the discipline to not fall victim to greed and herd mentality;
Protect yourself and family against debt and other life uncertainties through the purchase of insurance.
While it is important to know the differences between financial literacy and financial knowledge,finding an answer to the below questions will help you to really take charge of your life:
What are your plans for your life?
What do you want your money to do for you?
How do you plan to use your money and financial knowledge to help you achieve these plans?
Will you be better off if you have an independent advice and guidance along the way?
Therefore, increasing your level of financial literacy does not just rely on gaining financial knowledge, but it also involves raising your awareness, learning different skills, adopting the right attitude, and behaviour. Lastly, do remember that the level of your financial literacy and your answers to the 4 questions above directly affects the journey of your life and the growth of your wealth.
Fong Woon Bing, CFP is a licensed financial planner with VKA Wealth Planners Sdn Bhd. He is also a certified member of Financial Planning Association of Malaysia.
