What Is financial literacy and why should you improve yours?

How would you rate your financial vocabulary? Do you consider yourself financially literate? Are you scratching your head reading these questions? If so, no need to stress.Financial literacy is a concept that’s become more difficult to master in recent years, but it’s more important than ever. With the advent of digital banking technologies, open banking and more entrepreneurs going freelance or starting their own businesses, a good grasp of the financial lexicon has perhaps never been a more valuable skill.Fortunately, with all these challenges come numerous solutions. With SaaS and trusted experts in the fintech sector, the toolkit with which to build your financial vocab has never been more versatile. At Qonto we think banking and finance terminology shouldn’t be a language reserved for bankers and computers. We want to democratise the knowledge making sure everyone has what they need to be in control of their private and business finances. Read through this article to get the lowdown on financial literacy: what it is, why it’s important and how you can use it to improve your business and your life.

Financial literacy is a confident grasp of financial terminologies and concepts. This involves a good understanding of the following aspects which go a long way in providing financial security and mental wellbeing:

A survey by the OECD found that across Europe, about half of the adult population lacks a sufficient understanding of basic financial concepts. This is emphasised when taking into account lower income groups, women, older and younger generations, who generally score lower on financial literacy tests.In the US, a study from San Francisco-based Logica Future of Money found that over 70% of Gen Z and 55% of Boomers feel stressed about their finances. A lot of this stress can be alleviated by better financial literacy.  

Financial literacy will play a role in your life from the moment you reach adulthood and well into your old age. When you become financially independent, you are expected to take care of your finances yourself. The more comfortable you are with this concept, the better life you are likely to lead.As you plan for your future, you begin to think about career, travel, relationships, home, and retirement. The need to understand your finances will bleed into all of these areas in your life. A good grasp on the concept is undoubtedly going to assist you in experiencing them the way you always hoped you would.This is doubly true of budding entrepreneurs and hopeful business owners. While all financially independent adults are in control of their finances, those with entrepreneurial ambitions have much more complex financial management ahead of them. Not only the success of your business, but your mental health and wellbeing are likely to take a toll if you’re not comfortable managing your finances. Financial stress can lead to loss of sleep, fights with your spouse and a distracted mind, all of which will negatively affect your ability to run your own business.So how can you best ensure these things don’t happen? 

While good financial literacy requires more than just memorising key definitions,  there are a few basic terms and concepts you should hold onto. Below are selected financial literacy concepts that are of particular importance to small business owners, freelancers, and entrepreneurs.

A mentality for investors and an increasingly popular phrase in personal finance, it denotes a strategy in which you prioritise savings and investments while maintaining frugality. To adopt it, designate a portion of each paycheck to your savings before paying your living expenses.There are many mantras in the finance world and not all of them are useful. This one, however, should function like a reminder to invest in the future. You are, after all, your top priority. Once you begin to view yourself as a customer with a monthly payment, a more financially secure future will open up and you will begin to make plans with ease. Pay yourself first, thank yourself later.

Your budget is your estimation of revenue and expenses, spanning over a period of time in the future. It’s your financial plan.For entrepreneurs with designs on owning a business one day, budgeting is everything. The success of your venture is likely to depend on how you manage your expenses and plan for the future. You want to aim for a surplus budget, in which profits are anticipated. A balanced business budget will see your revenue equalling your expenses, and in a deficit budget, your expenses exceed your revenue.

Bankruptcy is a legal proceeding. It will occur if you as a business owner or sole trader are unable to pay your outstanding debts and must clear them to maintain your business.The important thing to know about bankruptcy is that it doesn’t spell the end for your business venture. It indicates you have entered a difficult situation financially, but bankruptcy offers the chance to reset and make a fresh start, offering owed creditors a chance to be repaid. It is important to note however that this will stay on your credit reports for years, making it more difficult to secure loans in the future. The choice to declare bankruptcy should be carefully considered.

A potential lender will make an assessment of you based on your creditworthiness. Whether or not they approve you of new credit will depend on their assessment.Your creditworthiness extends across multiple fields. Any debts, past bankruptcies, past due amounts—it is your financial history. Be sure that you understand the reach of creditworthiness so that you might fill in any potential gaps in your creditworthiness score before seeking out potential creditors. In Germany, creditworthiness is provided by an organisation called SCHUFA.

Business banking is banking tailored for your business. Providing business loans, savings accounts and checking accounts all designed for companies rather than individuals, business banking providers are experts in all financial matters for your business.It’s important to separate your business and personal accounts. Mixing the two can cause problems which are likely in turn to affect both aspects of your life. Also, when you sign up for a business banking account, you open yourself up to a huge selection of services: keep track of team spending with team cards, integrate your bookkeeping, and manage your expenses much more carefully than a personal account allows.

Despite their identical looks, there are crucial differences between debit and credit cards. Where a debit card allows you to draw funds you’ve previously deposited to your bank account, when you use a credit card, you are borrowing money from the card issuer up to a certain allowed amount. It’s your money vs their money.Both cards serve important purposes. When you sign up to get a credit card, you are entering into a financial arrangement with the card issuer in which you have promised to be able to pay the money back with interest. Your debit card, on the other hand, you don’t have to pay back to anyone, but it is your own money. Debit cards are for the more frugal among us who don’t want to accrue debt or pay interest, but you are limiting your available funds significantly if you only use a debit card.

Interest is the price of borrowing money. The borrower pays a fee to the lender for having loaned the money. Usually expressed as a percentage, interest can be either simple or compounded. Where simple interest is based on the original sum of the money borrowed, compound interest is calculated based on the initial amount plus accumulated interest from previous periods. It is essentially interest on interest.Understanding interest will help you make more informed investments and smarter loans. You need to decide based on the interest rate whether the lend is going to benefit you or ultimately end up causing problems. It’s also important to understand where your bank is loaning your money and how the interest is accruing. If you are inclined toward socially responsible investing (SRI) you might want to look into what your bank is doing with your money.

While familiarising yourself with terminologies and taking advantage of Qonto's blogand wiki are good ways to broaden your financial vocabulary, there are more resources out there that creatively tackle the problem of financial literacy overall.

Fintech is constantly evolving, both on the business side and the technology side. Startups break new ground with innovative new features, developments in open banking and SaaS radicalise financial management for business and customers.Stay abreast of what’s happening in the fintech world with our top picks for media outlets and finance news websites covering the fintech world.

We all use apps to better our daily activities: fitness, healthy eating, dining options, and language learning are all accelerated by the device we have in our pockets. So why not add ‘financial literacy’ to that list of daily improvements?It takes time just to scroll through the list of available finance apps and money saving apps—let alone read the reviews and discern which is best—so take a shortcut and peruse our curated list.

Even more on-the-go than apps or news resources, you can boost your financial literacy from gurus and professionals or keep up with the news while you cook, run or while away the time in traffic. We’ve listened to our fair share of finance podcasts and think you should check out these ones.

The most time consuming and demanding of your attention, good books promise the biggest reward on the subject you wish to learn about. Read books to become an expert on specific topics of interest to you rather than for general financial learning. That’s what the above resources are more suited to. 2021 was a big year for books in finance. With all these new entries and older classics take a look at our list of finance books to help you make a decision. 

Influencers with a financial inclination, finfluencers have grown in number recently across platforms like Youtube, Tik Tok, and Instagram. They claim to have neat tricks and life hacks to make you better with your money, but it’s important to discern the gurus from the grifters.Our article on finfluencers will help you to understand what to look for when coming across this new finance trend. 

If you’re just beginning your journey towards becoming more financially literate and you’re feeling a little overwhelmed, don’t worry. There’s a lot of information out there and it can seem like every resource exposes something else that you’re lacking. It’s important for both your business and your mental wellbeing to think of financial literacy as an ongoing process. Some of it will be self-taught and some you will learn by doing. The main thing is that you are always learning.As your financial literacy increases and your vocabulary grows, you will find that you make business decisions more confidently, that you don’t deliberate over investments and perhaps that you can see the growth of your business more clearly.