Financial Literacy: Why is it Important and How to Improve it

According to statistics, most of the population in Kazakhstan lacks significant savings and does not plan their budget. Often, this is not due to unstable employment or low wages, but rather a low level of financial literacy among the population. This article will explore the concept in detail, explain the importance of financial literacy, and discuss ways to improve it. We will also look at how to teach children financial literacy since it is important to introduce them to financial matters from an early age.

What is Financial Literacy?

Financial literacy is the set of knowledge that helps a person preserve and properly use accumulated capital. Simply put, financial literacy enables a person to live comfortably and manage their money so that even with a small salary, they can buy everything they need.

Who can be considered a financially literate person? This is a person who:

• Plans their budget and knows exactly their income and expenses.
• Spends money consciously based on well-considered decisions and avoids impulsive purchases.
• Has an emergency fund, a sum that maintains their usual level of comfort in force majeure circumstances (e.g., job loss or serious illness of a close relative).
• Has financial goals and saves with these goals in mind (vacation, buying a new home, taking out a mortgage, etc.).
• Knows their rights as a consumer and taxpayer.
• Is aware of fraudulent schemes and knows methods to protect personal data and savings.

The "highest level" of financial literacy involves studying the market and knowing how to use its tools, such as making investments and earning passive income.

Why is Financial Literacy Important?

Financial literacy allows people to confidently look into the future. However, it is not the only goal:

• It provides comfort in everyday life.
• It helps to handle crisis situations more easily.
• It teaches people to set the right priorities.
• It promotes a conscious lifestyle. For example, financial literacy is the foundation for optimizing spending and saving money.
• It helps achieve set goals.

Financial literacy is an important condition for a prosperous life not only for adults but also for children. These skills will help a child build the right relationship with money in the future. Children who know how to manage finances feel more confident, which lays the groundwork for their financial freedom in the future.

For adults, it is important not only to learn financial literacy themselves but also to involve their children. For example, within the framework of the BCC Junior project, Bank CenterCredit has prepared a series of free online lessons for children aged 6 to 18. The lessons are divided into blocks depending on the age of the users and cover a wide range of topics—from the history of money and types of bank cards to financial security and investments. After training, the child can take a test and receive one of the statuses—Junior Expert, Budget Master, Bank Guru, or Financial Wizard. A certificate serves as documentary confirmation of the training.

How to Learn Financial Literacy?

"Where to start?" is a logical question when learning financial literacy. Ramsey Solutions advises focusing on three aspects.

1. Managing a Monthly Budget.

You will objectively assess your budget and understand how much you spend. You can make a list on paper, create a table in Excel, or use apps to calculate expenses and income.

First, consider all sources of income (salary, investments, cash gifts). Second, detail your expenses. It is most convenient to do this by category: food, utilities, communication, car maintenance, clothing, medicines, etc. Most expenses are fixed amounts that recur from month to month. However, it is also wise to set aside a small amount of money for emergencies. For this, Bank CenterCredit offers deposits for both adults and children. The application allows you to set up automatic deductions of funds whenever there is an account replenishment, such as a salary, withdrawing money from the account on a specific day, and rounding up—for instance, 50 or 500 tenge will be transferred to the deposit at the end of the day. This helps to save automatically and at a comfortable pace.

How to distribute money, considering financial literacy? There are many ways. The simplest is to calculate the sum for mandatory expenses, subtract it from your income, and use the remaining money as you wish (save, spend on entertainment, etc.). You can use the six-jar method, where 55% of income goes to current expenses, and the remaining funds are distributed among the other five "jars" (investments, savings, education, entertainment, gifts). According to the 20-50-30 method, 50% of income is allocated to current expenses, 20% to savings, and the remaining 30% to everyday spending (travel, coffee, car refueling, beauty salon, etc.). Financial consultant Richard Jenkins proposes the 60-10-10-10-10 method, where 60% of income goes to current expenses.

But what if money is not enough even for current needs? There are two ways to fix the situation: either reduce current expenses or look for additional sources of income.

2. Creating an Emergency Fund

This is a reserve fund that will be a relief in force majeure circumstances (e.g., needing to undergo an expensive medical examination or buy a refrigerator to replace a broken one). With these funds, you will maintain your usual lifestyle even if you temporarily stop receiving income (e.g., when looking for a new job).

Financial advisors believe that an optimal emergency fund should be an amount sufficient to cover 12 months of living at the previous level of comfort. Initially, aim for an amount that would last for 3 months.

How to build an emergency fund? There are many options here as well. For example, as David Bach suggested in his book "The Latte Factor," pay yourself first—set aside 10% from each money receipt. You can use a piggy bank and "throw" change into it (or transfer the remainder on the card to a separate account). You can set aside every time you were going to spend money spontaneously (e.g., on a third coffee from a cafe for the day). The piggy bank method is also suitable for children: it is simple and extremely understandable.

Use deposits or life insurance savings. Deposits allow you to preserve savings and increase them through regular interest accruals.

3. Investing in the Future

This category includes everything that will contribute to your well-being in the future. If you buy an expensive item, it will simply become outdated over time. But you can spend money on a training course that will help you achieve new professional successes or on a powerful computer to facilitate work. Also, many valuable items can appreciate over time due to exchange rate fluctuations, allowing you to earn income in the future. Collectibles are also a good investment, as their prices tend to rise.

Life Hacks to Improve Children's Financial Literacy

Children learn by observing their parents. Financial literacy is no exception. If parents treat money responsibly and know how to distribute it wisely, the child will absorb the same "program." However, there are several life hacks that will help "reinforce" the topic and adapt to the world of money more quickly:

1. Help Manage Pocket Money.

Experts believe that a child over the age of 6 should have their own money, which they can manage independently. It is better to replenish the child's "reserves" once a week, allowing them to grasp the very essence of the idea of saving.

Help the child calculate how quickly they can save up for what they want. For example, 10% of pocket money can be set aside, and in this case, they can save up for their dream (like a specific toy) in a certain amount of time.

2. Make a Wish List Together.

Children, like adults, want everything at once, but that is not possible. Set priorities with the child and remind them of them. A wish list will solve this task. Let the child jot down everything they dream of on paper. An adult can help them arrange the items from the most desired to the one that can be left for later. The list can be hung in a visible place, like above the desk.

3. Participate in "Financial" Games.

For the youngest children, games like a store or restaurant are suitable. Older children can be offered thematic board games, such as "Monopoly," "Cash Flow," or "Money."

4. Incorporate Smartphone Learning.

Children who have already mastered the smartphone can use apps to track their income and expenses. This is more engaging than theory or practice in a paper table. Let the child categorize all purchases made by the family. This will help them understand what needs the money is directed toward, what the sums are, and realize the priorities of adults.

Pay attention to well-known animated series in Kazakhstan, where financial literacy and financial culture issues are addressed. For example, the animated series "Fixies" has episodes dedicated to spending and money in general. Animated series present information in a way that is easy for children to understand.

5. Discuss All Children's "Wants." 

Children are prone to wanting what they see. However, most such purchases are impulsive. One way to prevent them is to pause. Agree to delay the purchase for one day: if it loses its relevance (which is likely to happen), the money will be saved. By the way, this is why it is not worth taking the child's savings to the store: if there is no money on hand, it is impossible to buy anything with it. This will teach the child to be more restrained in their spending.

Another important aspect of teaching a child financial literacy is constant dialogue with parents. Answer children's questions, talk about the current situation in the family, discuss purchases, choose things together, and do not brush off such complex topics as debts and loans. All this knowledge is essential for a holistic worldview, and the child can only get it from their parents.

This article has been translated from its original language using neural network-based translation technology.