Introduction to Financial Literacy
Financial literacy refers to an individual’s grasp of financial concepts. How financially literate you are is often a key determinant of your financial success in future.
As a young person, understanding how finance works is not a choice. Your financial knowledge literally affects your life. So, you must take the time to improve on your financial literacy. You don’t want to lose your hard earned salary, business income or even inheritance.
In this insightful piece, finance educator Olubube Nwosu explores the meaning and rudiments of financial literacy and explains why everyone must improve on their financial knowledge.
What is Financial Literacy?
I define financial literacy as the confluence of knowledge bordering on investment, savings, credit, and debt management which are all important to enable us make financially responsible choices from day-to-day and for long term purposes. Financial literacy is an important suite of knowledge that remains useful throughout your life.
Imagine trying to sail without oars — that’s what living life without understanding financial literacy is like. Financial literacy helps you reach your destination in life by making sure you make sound financial decisions that move you closer to achieving your dream life.
Why is Financial Literacy Important?
In 2020, over 3 million adults in Nigeria lost 18 billion naira to Ponzi schemes. You would think many would have learned from MMM, but alas, new words and tricks from Ponzi marketers swayed many Nigerians who thought they had now found a “smart investment scheme.”. A ponzi scheme literally uses new investors money to pay old investors. This continues till the pool of new investors dries up.
One major challenge we face in Nigeria is the level of financial illiteracy; we know little of how money works. It’s one thing to make money and another to manage and grow money. Don’t just assume you understand this; Intentionally seek to understand how money works.
About 5-10 years ago, many older Nigerians lost a fortune in the burgeoning Nigerian stock exchange, and now, many swear that stocks are pure scams. Since then, the Nigerian stock market has been largely uninteresting for many adults.
Unfortunately, a similar thing is happening in the crypto space now, and many will still swear in the coming years (or worse still, months) that it is all a scam.
Is crypto a scam?
Are stocks fraudulent things?
Neither is. The real problem is the lack of financial literacy.
Financial literacy does several things to individuals — the most important being its ability to fix a “get rich quick mentality.”
Before you invest in any asset or instrument, you must understand what it represents, how it gets its value, the possible risks, and returns.
But before you talk about investment, you must first understand how money works. The next step is to understand some basic finance terms.
Afterward, you learn how to plan your income. Then you finally study different investment options (don’t forget to be honest about your risk appetite!).
You need — must! — learn how money works. Want to know how? Continue reading!
How Does Money Work?
Money is a generally accepted means of exchange. People in a society decide that money should represent the value of their different commodities (goods and services). A standardized money system makes trade faster, facilitates credit transactions, and makes it possible to store value (save and invest money) and make accounting possible (profit or loss is easy to determine).
We can make a profit when we trade (selling price > cost price) hence, more input (money) means greater output (more money). So, we ask for loans (business capital). The lender knows we can make profits with the money. The lender also knows that we may lose the money due to business risks. So, the lender asks for interests (a representative of both possible risk and returns).
After making a profit and paying the loan interests, the remaining profit belongs to the business owner(s). They share it according to their ownership of the business (represented by what we call shares). They also set aside some money from the profits to run the business for the following month/year at a bigger capacity (increase the business working capital).
As an employee, after working for the year/month, the money you take home is your income. This will either be spent (for your needs and wants), saved (for emergencies or unexpected expenses), or invested (used to buy an asset).
Assets are items that do either or both of the following — grow in market value and bring in cash flow (extra income). For example — a house (can grow in value and can bring rent), a commercial motorcycle (can bring in daily returns), gold (can grow in value).
Each one has different possible risks and returns. They can either be actively or passively managed (hence, the term “passive income”).
Before you invest, you must ask yourself very important questions: How well can you handle loss? Are you a risk-taker? What’s the end goal of this investment? These are excellent determinants of your risk level.
How can one become Financially Literate?
One of the things I have noticed a lot during my contributions at Koinsandkash, is the level of financial illiteracy in the average Nigerian adult.
So, what do you do when trying to learn something new about money or finance?
Read Investopedia articles?
Check the Oxford Dictionary?
Call your banker friend?
Perhaps, you’re like me: the nerd who Googles the term; reads several articles on the topic; before watching several videos for further explanation. I may even read research papers, industry publications, journals — anything capable of broadening my knowledge on that term.
It’s easy for me to look beyond the complex financial language or the absurd length of these learning resources, because I love reading and discussing money and finance. I absolutely love learning the meaning of the newest finance buzzwords and increasing my knowledge.
However, I occasionally find these articles hard to read and loaded with too much jargon. This is quite ironic, given that I study Economics and have perfected the art of consuming really boring info.
If I can get tired of reading finance-related content, what happens to the average reader who’s not a finance geek? This guy just wants to have some knowledge of financial systems, not earn a degree in Business.
Despite that, many websites and financial experts fail to tailor their financial education towards the average reader. This explains why financial literacy remains low, especially in countries like Nigeria.
To reduce financial illiteracy, we must create beginner-friendly resources for average individuals who wish to learn about finance. This is why I created Swoosh — the most comprehensive Nigerian course on financial literacy. It is also why I create the Crypto Beginners Course.
You would not find a better guide on financial literacy anywhere else in the world, except I create a new one. Trust me.
Instead of bugging your banker friend with questions every day, you can get premium, easy-to-understand info from these courses. You’ll get to learn more about finances — see more examples, learn how to share your income, and know much more about why money and investments exist. Then you also get to latest about the latest finance/money buzzword – crypto.
The courses each sold for N10,000 when I released them in 2021. Fortunately, the courses are now available for FREE courtesy of Koinsandkash, a crypto investment, savings and money transfer platform. Yes, I am a crypto evangelist too.
After investing in this knowledge, you won’t be part of those losing 18 billion naira anymore to ponzi schemes. Like a wise man once said: “investment in knowledge pays the best dividend. Whether you are already working or you are still yet to get a job, now is the time to arm yourself with this essential financial knowledge.