What Are Some Good Personal Finance Practices and Why Financial Literacy Matters?

Everything good in life comes when you use it to the best of its true and intended purpose. Money is a tool and the smarter you are when using this tool, the greater it rewards more you will be relaxed in life. The general rule of thumb in personal finance is making sure that you do good and thorough research before you decide. make a decision. Decisions regarding finance may be influenced by emotions however they must be followed through with some key analysis. Let us explore analysis and why it is very fundamental in the decisions you make.

What Role Should Analysis Play in Personal Finance

We all struggle with personal finance at some point in our lives. Let us take the Canadian Economy, for instance, we can look at financial literary through the lens of three theoretical lenses’ such as neoclassical economic theory, behavioral economic theory, and institutional theory.

Neoclassical economic theory states that a useful way to understand consumer financial knowledge and decision making. This theory states that individual consumers operate within the free market and make logical decisions based on maximizing their satisfaction. People who benefit from this theoretical perspective need to take note of this theory in three parts. From a consumption perspective maximizing leisure seems to go hand in hand with logic but often. To make better decisions consumption must be annulled equally by a greater income form or by greater capital returns from assets that have been purchased. Next neoclassical economics also finds that the consumer takes a long-term view of his or her life, making decisions about current consumption. This is purely done to maximize lifetime utility. We must look at the Life-Cycle theory as it is a fundamental aspect of many parts of the financial industry as well where the consumer bases current consumption on an expectation of future income. Finally, the neoclassical economic theory is disinterested in the institutional context in which consumers make decisions, assuming instead that competitive markets provide desired goods and services at efficient prices. These goods and services are provided with few transaction costs and are not hampered by misinformation and persuasive advertising.

Behavioral economics relaxes the assumption about simpler consumer optimization, It finds that people may behave in complex ways that cannot be reduced to utility-maximizing. Sometimes referred to as “bounded rationality,” experimental economics seeks to understand how people make decisions. This theoretical view has a hard emphasis on human behavior but does not pay mind to the role of institutions in society.

The final and important view on that theoretical perspective has the potential to integrate both advances in behavioral studies and a closer examination of the role of institutions. Let us have a look at the quote from the Work of Sherraden and Barr (2005); “Behavioral economists are introducing ideas such as wishful thinking, overconfidence, faulty future orientation, use of mental accounts, and the like. Essentially behavioral economics is specifying new aspects of the individual for study. The whole individual is coming into view. . .. I am trying to do something similar, but with the other “half” of neoclassical theory. I am also trying to specify the equally vague area that individuals interact with, known as “constraints.” I aim to describe a richer, more detailed understanding of factors that individuals face in making choices.

Finance can be easy and it can be quite hard. But it is all based on the actions of the individuals that are either spending or saving well. We can look theoretically to have an understanding but to know what financial analysis is, one must look at how to survive in today’s economy.

How to Survive In Today’s Economy

Let us set the record start. This is not as easy as it may look. The inflation rates in Canada have gone down in recent years. We can understand that Inflation is a general increase in prices and fall in the purchasing value of money. With that said the value of money will always decrease given the rise of new currency and the change in the spending trends within the economy. Broadly every survival tactic that is based or related to the economy is embedded in the notion of Financial literacy.

What even is financial literacy. The United Nations declares this in the case of Youth to be “Access to financial and social assets is a key contributing factor to help youth make their own economic decisions and escape poverty”. They term it as financial inclusion as they wish to engulf all borders, races, religions, cultures that separate people and their social stratosphere. From here we can then narrow this down by looking at Government based tools that are provided in today’s time. These tools are indicative and allow people to be proactive in their approach to planning. The financial toolkit presented by the Government of Canada. There are seven modules, and you can go through each to learn how to generally make better decisions towards financial goals that you may not even have set up for yourself. But you most definitely will after be reviewing this financial toolkit. It is right there for those who wish to have their financial knowledge taken to new heights. Each module works like a step towards financial success. The very first one is Income, Expenses, and Budget. This takes the user for a personal ride on their own finances and how they are spending, saving, and what their current consuming habits are being made out to be. The second module is Banking, and it teaches you how to maneuver around financial institutions and where to keep your financial cash flow safe and secure with a variety of options to choose from. Module 3 will teach you how to put yourself in control which is through savings. As well as module 4 will teach you about Credit and Debt Management where you will learn how to borrow and keep up with a credit score. The transition of credit then transfers onto Mortgages with the 5TH Module being on Mortgages. The 6th module focuses on Insurance and why that is important in the long run. Module 7 is Investing. Module 8 is Income Taxes. Module 9 is Income Taxes in Quebec. Module 10 is Retirement and Pensions. Module 11 is Financial Planning and Finally Module 12 is Fraud Protection. What all these modules do is prepare you for the best. Or maybe yet, for the worse if you are currently dealing with financial liabilities.

We should know that due to rising life expectancies and falling fertility rates, there is a greater strain on employer-sponsored pensions and social security systems around the world, that are now changing. Canada is one of them. In response to that, the Canadian retirement schemes have pivoted towards an individual-account defined contribution system. This system rewards people for how they have earned throughout their lives. This system of financing imposes on workers the responsibility to save invest and spend wisely over the lifecycle and in some ways, this transition has wrought a change for the better. Let’s take a look at the labor force being mobile, with pensions being portable, the defined contribution system is more flexible than the defined benefit system. This takes accountability of those who fail to invest, save, or even use their finances responsibly in their earning years.

International studies of financial literacy also explore how financial literacy relates to retirement planning. In most of the countries studied, those who are more financially literate are more likely to plan for retirement, even after accounting for a large set of economic circumstances. Given the many differences in pension schemes, privatization of pensions, and generosity of the pension system across countries, this is a remarkably consistent result. While some may argue that financial literacy is itself a choice variable so that the association between financial literacy and retirement planning may not be causal, studies reported herein find little evidence that people invest much in financial knowledge. Indeed, it is unclear how people could improve their financial knowledge even if they wished to, given the paucity of adult education programs in several of the countries around the world.

A study shows that financial knowledge across eight countries including North America and South America has provided a deeper understanding of the causes and consequences of financial illiteracy. It is concluded that financial literacy is very low around the world irrespective of the level of financial market development and the type of pension provided. Accordingly, changes in the market have apparently not wrought enhancements in financial knowledge, suggesting that there may be a limit on what people can learn by themselves from their financial experience. There are also important sex and age differences common across countries in financial knowledge. Women uniformly know less, and they know less, than do men, in terms of financial knowledge. Low levels of financial knowledge in older populations also suggest that these groups may be particularly vulnerable. Third, most workers, including older ones, have not planned or even thought much.

Here is where the importance of macro and micro-savings comes in. At a macro level, savings are representative of the population's ability to increase its cash flow. Through this increase in cash flow, there is technological and economical progress. As far as micro-savings go individuals have access to financial literacy and are following the right directions towards minimizing debts as well. Therefore financial literacy is important because workers, including older ones, have not planned or even thought much about retirement because at the end of the day savings at the micro-level are meant to be focused on a long-term goal that is tangible and at the end of the day takes the individual from point a to point b in a financially stable position. This is regardless of the asset class size.

How Is the Economy Changing?

The demographics are changing. The economy is changing also. Let’s see how that works. The baby boom generation had fewer children than their parents; therefore, as the baby boom generation retires, there will be fewer workers to support a greater number of retirees. At the same time life expectancy has increased so the baby boom generation will likely spend more time in retirement than previous generations and may need to be supported for a longer time. This situation results in a need for more savings to cover the increase in living expenses and the severe demands on individual and public finance.

Financial Markets continue to change because technological changes and market innovation have changed the nature of wholesale and retail banking and it is likely that it will continue to change. At the retail level, technology has increased the amount of credit available, and the internet has increased both the amount of information about investment and credit and the availability of these products. Electronic banking makes it necessary to at least have a bank account, yet a significant percentage of the population does not participate in the conventional financial system. The number, availability, and complexity of financial products have increased. Information technology and telecommunications have made it possible to tailor products to specific markets. As the number of financial products has increased, consumers have become able to choose with respect to fees, interested rates, and maturities. The complexity and choice of products can make it difficult for consumers to assess them. In Canada alone, there has been an increase in the number of alternative financial service providers. Research points to various factors for the increase in the market for alternative financial services.

Employment and Pension Systems are Changing.

Employment trends are changing such that fewer people have long-term, continuous employment. Part-time, contract, and non-permanent employment require a different set of financial management skills than those needed by full-time, permanent employees. Related to this, a growing segment of the workforce lacks traditional benefits. At the same time, a major trend in pension systems has been the change from defined benefit to defined contribution pension schemes. In the former, employers assume responsibility and risk. In the latter, individuals assume responsibility for investing and the risk of investment. Governments have been changing benefit programs an example being the need to apply for Old Age Security in Canada and Guaranteed Income Supplement through the tax system. These changes have taken place the time as the baby boom generation and the increase in life expectancy means that more retirees will need adequate retirement incomes. The changes in pension arrangements mean consumers need to become involved with financial markets.

Now we would like to finally conclude this article with a bang. THERE ARE CONSEQUENCES OF POOR FINANCIAL DECISIONS AND THEY ARE BECOMING MORE AND MORE SERIOUS DAY BY DAY. The aging of the baby boom generation and the erosion of social safety nets are making individuals’ financial decisions more important. Other sources of increasing financial insecurity, such as changes in employment, mean that there are greater risks and fewer resources to cushion individuals and households from the impact of poor decisions. The increasing numbers of consumers, the pace of change in types of services, the introduction of new technologies to deliver them, and the level of complexity have led to more aggressive marketing and fraud.6 Consumers may be convinced to invest in products that are not in their best interests. Sales agents may not always make clear the potential risks of some investments. Consumers are at risk from their financial ignorance. The growth in the number of alternative financial institutions such as payday loan businesses and retail cheque cashing outlets is a special concern. Consumer debt is at an all-time high. Increases in income mean that more people are buying on credit, taking out loans, and buying homes. Even though deregulation may have resulted in more competitive credit rates, the increased competition for credit cardholders has likely contributed to the number of young people with high debts at a time when they are starting families and buying homes.

What Is Financial Capability and How do We make The Most Of It?

Surveys indicate that many consumers do not have an adequate financial background or understanding. The OECD’s Improving Financial Literacy concluded that financial understanding is low among consumers across OECD countries, especially among the less educated, minorities, and those at the lower end of the income distribution. Consumers need to be convinced of the importance of saving and wise investment choices.

Let's take the term financial capability as an example. This term is understood as being a set of financial knowledge, skills, and behaviors among individuals, with each part, defined as follows.

Financial knowledge and understanding is the ability to make sense of and manipulate money in its different forms, uses, and functions, including the ability to deal with everyday financial matters and make the right choices for one's own needs. Financial skills and competence is the ability to apply knowledge and understanding across a range of contexts including both predictable unexpected situations and also including the ability to manage and resolve any financial problems and opportunities. Financial responsibility is the ability to appreciate the wider impact of financial decisions on personal circumstances, the family, and the broader community and to understand the rights, responsibilities, and sources of advice or guidance. When an amalgamation of the above where financial knowledge and understanding come with skills and responsibility only then can we have a financially literate individual.

Financial literacy is a narrower concept than “emphasize(s) objective knowledge on specific topics related to money, economics, or financial matters, and subjective measures of self-reported confidence”. The term has been defined as follows. The ability to read, analyze, manage, and communicate about the personal financial conditions that affect material well-being. It includes the ability to discern financial choices, discuss money and financial issues without (or despite) discomfort, plan, and respond competently to life events that affect everyday financial decisions, including events in the general economy.

In The End, Does It Even Matter?

We all wish you well in our financial lives. Whether we work towards that or not is something that is left to ourselves to finish and complete. Financial literacy will do you good in the future and it will become the strength and foundation to much more vibrant life. Having financial freedom is something that most people do not get to experience in a lifetime because they do not start early. I have pointed out some important statistics and important facts that will guide you to a better financial life. Feel free to subscribe to my Medium profile and follow me on my social media channel for some dope content.

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| |Writer for technology and finance sectors. Product cycles and new technology trends beat economic cycles. | | Marketing Coordinator/Financial Analyst. | |

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Muhammad S. Shahid

Muhammad S. Shahid

| |Writer for technology and finance sectors. Product cycles and new technology trends beat economic cycles. | | Marketing Coordinator/Financial Analyst. | |

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