Revise and summary two articles
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FinancialLiteracy1.docxRunning Head: FINANCIAL LITERACY 1
FINANCIAL LITERACY 10
Financial Literacy
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Student’s Name
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Financial Literacy
Introduction
Any average investor of American origin usually makes financial decisions, specifically when it comes to retirement and saving. Some of the costly errors include the failure in making sure that there is receipt of the employer matching contribution towards your saving, inadequate saving, the payment of excess interest costs and excessive fees and the substandard diversification (Deuflhard et al., 2019). The evident prepondence portrays a picture of the general inadequacy of understanding for return, risk and diversification in the stock markets.
The financial literacy is the capability of understanding and correctly applying the financial management skills (Deuflhard et al., 2019). The act of managing debts properly, calculating interests properly, effective planning for finances as well as understanding the time value of money is what financial literacy entails.
The resulting poor financial behaviours and the financial knowledge low levels with the effect being seen in the troubled context of the pension’s disappearance and the improved personal responsibility in terms of the retirement plans well seen in the defined patterns of contribution plans is a good proof that financial literacy is becoming a common phenomenon. In the modern finance, there is a component of punishing financial ignorance and rewarding of the do it yourself component of necessitated by financial knowledge. The lack of regulation of the financial markets and the comparatively easy access to credit has increased further the appetite for financial knowledge (Calcagno et al., 2019). Most individuals are now responsible for making their own investment choices and could end erring in security selection and the asset allocation or even both.
Financial Literacy background information
Financial literacy refers to the ability to effectively and efficiently manage and evaluate your finances so that you make prudent decision geared towards attaining your life goals and achieve the financial well-being (Calcagno et al., 2019). When you are financially literate, you will protect yourself from being exploited either through questionable investments or identity fraud and this allows you to meet the everyday or basic needs.
How financial literacy affects your daily life
There are five basic components or areas in personal finance that people need to acquint themselves for them to become financially stable (Deuflhard et al., 2019). Capturing and making these areas part of your life is important in many aspects of our day to day life and that include;
Income and money
Education, career choices and job skills all affect our finances and income. There has always been a trade-off between effort and time, rewards and money. Time will always be in tandem with money. When you working for a living which many of us do, you will be entitled to a salary and it is important to work out the salary not in terms of the montly earnings but hourly earnings. For instance, based on the United States department for labour, in the year 2000, the medium yearly earnings for the administrative assistants and executive secretaries were around $32000 (Deuflhard et al., 2019). This means that it will take a person with this kind of income almost one hour and half to purchase a CD worth $20. The most important thing to remember is to know your income, both unearned and earned, Understand the gross earnings and the net earnings, any income that always goes to someone every month, may be your parents and also remember that inflation will always reduce your buying power.
Money management
What you want and what you need are two different things. The truth of the matter is that we will not have adequate money to purchase whatever we want in life. In this regard, it is always important to talk about the priorities before you spend. Financial responsibility entails of taking care of the financial future (Deuflhard et al., 2019).
Money needs control. A budget is the plan for spending that will help you control and forecast your expenses. Thought close scrutiny of what you spend and allocating money as strictly as it demands, will enable you monitor your cash flow while saving big items that you would like to buy in future. Therefore the financial plan will help you plan for the future.
Debt and Spending
Whether you spending later or now, whatever you buy, it is always taken from earnings or income. Consumers that are careful will compare the costs and benefits of spending on alternatives. Whenever you spend more than you are getting, you will plunge yourself into debts (Deuflhard et al., 2019). Credit is not equal to the free money but it is a basic financial tool.
Investing and Saving
Saving is not about the brain power but the will power and it means not spending money. Investment will mean that you get a return on the money that you put somewhere. Saving accounts can be forms of investments though they have a low rate of return. Therefore we can say that save is the initial step and you need to do it until you are ready to invest. Investments ordinarily grow and end up helping you in achieving you long term goals (Hanson & Olson, 2018). Understanding of the capital markets is increasingly becoming important with multitude of Americans now doing investments on their own.
Risk management
There will always be risks that are associated with saving and spending money but on the contrary, there will be ways to mitigate these like the risk transfer through insurance, risk control or risk avoidance. Insurance will protect you against large losses like the calamities or unexpected things like medical emergency and death. It is not enough to be careful; you need to protect yourself from privacy infringement and identity theft.
Current Research
There is always a relationship between the financial literacy and the investment decisions. Those people with some financial knowledge tend to make better decisions in terms of the investment plans. The first article tries to assess the assets allocation which forms the basis of the naïve diversification, financial literacy and the security selection. The article then talks about whether the participants and the people in general can consider return and risk when making decisions that concern their financial life. Through presentation of the security select scenarios or options, we are able to establish whether there is a difference between those financially literate and those financially illiterate (Seay et al., 2016). Those financially literate tend to make their financial decisions based on the security select choices as compared to those financially illiterate.
The second article tries to establish that there could be more financial knowledge if students in school are taught this subject from the beginning as opposed to the current situation where those in financial institutions or careers are the ones that have this knowledge. Those life aspects are good and can help them in future. It gives five components of the financial literacy (Seay et al., 2016). They include the basics of budgeting, understanding the concept of the interest rates, prioritization of savings, understanding the traps of the credit debt cycles and the identity of the safety and theft issues.
Financial literacy, naïve diversification and security selection
There is always a relationship between the financial literacy and the investment decisions. Those people with some financial knowledge tend to make better decisions in terms of the investment plans. The first article tries to assess the assets allocation which forms the basis of the naïve diversification, financial literacy and the security selection. The article then talks about whether the participants and the people in general can consider return and risk when making decisions that concern their financial life. Through presentation of the security select scenarios or options, we are able to establish whether there is a difference between those financially literate and those financially illiterate (Skagerlund et al., 2018). Those financially literate tend to make their financial decisions based on the security select choices as compared to those financially illiterate.
The literature about the financial literacy has suffered from inconsistent definitions and the valid and instrument. Financial literacy is I many occasions related or equated to the financial knowledge via questions that are related to familiarity to the financial instruments or the understanding of the financial theory and the numeracy (Skagerlund et al., 2018). Scholars have overall acknowledged the multi-dimensional stature of the financial literacy by not covering the financial knowledge only but also the actions and information gathering processes
A wide range of the cognitive and behavioural biases have been put into definition in the financial literature. Presently, the study focuses on the investing errors and the cognitive biases contrary to the behavioural biases that affect the investors. Whilst biases and erros result in the substandard financial outcomes, many of the households manage their incomes adequately. However, the minority of the poor and the less educated people err in many ways like the diversification (Skagerlund et al., 2018). Particularly, investors tend to have the less diversified portfolios as compared to the financial models advice.
In the aftermath of the asset allocation decision, the investors ought to select investments inside every asset class. The focus is on the stock security selection though the overall principle is to all the instruments that includes the mutual fund selection.
The five key components of financial literacy
This article tries to establish that there could be more financial knowledge if students in school are taught this subject from the beginning as opposed to the current situation where those in financial institutions or careers are the ones that have this knowledge. Those life aspects are good and can help them in future. It gives five components of the financial literacy (Tiboh, 2016). They include the basics of budgeting, understanding the concept of the interest rates, prioritization of savings, understanding the traps of the credit debt cycles and the identity of the safety and theft issues.
Creation and maintenance of a budget is such an important aspect of staying afloat of your finances. When you do not follow the budget model, it is not always easy to be accountable for your finances. Understanding of the interest rates is helpful in the sense that you will be able to make a rational decision like accessing to the credit and the repayment plans. Another aspect of the financial literacy is the prioritization of the savings (Tiboh, 2016). Another aspect of the financial literacy is that of trying to avoid the traps of the credit debt cycle and finally being sensitive to safety and the identification of theft issues.
Conclusion
Financial literacy is an important aspect in life. Those who are financially illiterate find it hard to survive in this cruel world. Everyone will want to take advantage of you. State and federal government ought to introduce a mandatory field in schools so that higher institutions can churn out financially literate graduates. This enables them make rational decisions when undertaking investments.
References
Deuflhard, F., Georgarakos, D., & Inderst, R. (2019). Financial literacy and savings account returns. Journal of the European Economic Association, 17(1), 131-164.
Guarenti, G. (2019). Financial literacy effects on economic behavior: empirical evidence from Italy.
Deuflhard, F., Georgarakos, D., & Inderst, R. (2019). Financial literacy and savings account returns. Journal of the European Economic Association, 17(1), 131-164.
Hastings, J., & Mitchell, O. S. (2020). How financial literacy and impatience shape retirement wealth and investment behaviors. Journal of Pension Economics & Finance, 19(1), 1-20.
Hanson, T. A., & Olson, P. M. (2018). Financial literacy and family communication patterns. Journal of Behavioral and Experimental Finance, 19, 64-71.
Seay, M., Kim, K. T., & Heckman, S. (2016). Exploring the demand for retirement planning advice: The role of financial literacy. Financial Services Review, 25(4), 331-350.
Skagerlund, K., Lind, T., Strömbäck, C., Tinghög, G., & Västfjäll, D. (2018). Financial literacy and the role of numeracy–How individuals’ attitude and affinity with numbers influence financial literacy. Journal of Behavioral and Experimental Economics, 74, 18-25.
Tiboh, T. (2016). An Analysis of Personal Financial Literacy Among Polytechnic Students-A Case of Kumasi Polytechnics (Doctoral dissertation).
