Financial literacy is a crucial foundation for encouraging the use of financial facilities, particularly digital financial facilities, which are now increasingly popular with the public.
The success of financial literacy can be seen in the increasing public awareness of using financial services such as mobile banking, e-wallets, and digital investments.
Financial literacy is not only about understanding financial products and services, but also about managing your personal finances in a more planned and careful manner. Is that the only role of financial literacy?
What is Financial Literacy?
Financial literacy is a person's ability to understand and manage their finances effectively and appropriately. This includes knowledge of how to budget, save, invest, and recognize various types of financial products such as loans, insurance, and mutual funds.
A good understanding of financial education and literacy allows you to manage your personal and family finances more wisely, while avoiding potential financial risks in the future.
According to the Financial Services Authority (OJK) definition, financial literacy is a combination of knowledge, skills, and beliefs that influence a person's attitudes and behavior in making quality financial decisions to achieve well-being.
Therefore, it is crucial for you to continuously improve your understanding in this area. The Financial Services Authority (OJK) noted that the Indonesian public's financial literacy index in 2022 reached 49.68 percent—a significant increase compared to 2013 (21.84%), 2016 (29.70%), and 2019 (38.03%). This demonstrates the need for continued financial education to raise public awareness.
Benefits of Financial Literacy
Financial education and literacy are not just about providing the latest information about the financial system; they also play a significant role in improving people's quality of life. Here are the more detailed benefits.
1. Improved Financial Management Skills
When people are equipped with proper and comprehensive financial education, this will become a valuable skill for the future. You will be more skilled in utilizing various available financial facilities and services, from savings and investment products to insurance.
Furthermore, you can also use various digital financial tools to plan budgets, record expenses, and regularly evaluate your financial condition.
2. Increased Responsibility for Personal Wealth and Use
With good financial literacy, people will better understand how to use money and manage personal assets wisely. You will be better able to distinguish between needs and wants, resulting in more controlled spending.
Wealth will also be directed toward productive activities that can increase the value of assets in the long term. As a result, your personal wealth can continue to grow sustainably.
3. Establishing and Implementing Smarter Financial Strategies
One of the important benefits of financial literacy is the ease of developing a financial strategy that aligns with your current financial situation. With a good understanding, you can determine priorities, set short- and long-term financial goals, and develop a realistic financial plan.
4. Facilitates Decision-Making for Personal Financial Growth
The higher the level of financial literacy, the easier it is to make financial decisions that positively impact personal financial growth.
You will know how to create a detailed monthly financial plan, choose appropriate management methods such as budgeting or digital record-keeping, and set aside a portion of your income for savings or investment.
These decisions, if made consistently, will help you achieve healthier financial stability and growth.
5. Minimize Financial Risks for a Better Retirement
By understanding the potential risks and benefits of various financial instruments, you can make wiser and more informed financial decisions. For example, choosing investment instruments that align with your risk profile—such as stocks for long-term growth or bonds for more stable income.
Financial literacy also enables you to recognize the characteristics of investment scams, allowing you to avoid pitfalls like fraudulent investments. In the long term, this knowledge is crucial for designing an appropriate retirement strategy.
You can choose options such as pension funds, life insurance, or property investments that can provide a source of income in retirement, ensuring your dream of a comfortable retirement remains a reality.
Financial Literacy Success Parameters
To determine the extent of the public's understanding of finance, you need to understand the parameters used to measure financial literacy. The Financial Services Authority (OJK) has categorized this understanding into several levels, including the following:
Well Literate
You are considered well literate if you have in-depth knowledge and trust in existing financial institutions and products. This includes an understanding of consumer rights and obligations, product features and benefits, types of services, and potential risks.
Furthermore, you also have the ability to use various financial services or products appropriately and responsibly according to your needs.
Sufficient Literate
The next level is sufficient literacy, which means someone has a fairly good level of financial understanding.
In this category, you have a general understanding of and trust in financial products and institutions, from their functions and benefits to how to use them. Although not as in-depth as well literacy, you are able to make well-considered financial decisions and are familiar with the world of finance.
Less Literate
In the less literate category, someone has a basic understanding of financial institutions and products, but lacks the confidence to use them.
You may be familiar with various financial services in theory, but feel unsure about using them in your daily life, either due to a lack of in-depth information or a lack of direct experience.
Not Literate
Not literate is the lowest level of financial literacy, indicating that someone lacks knowledge or trust in financial products and institutions.
You don't yet understand the functions, benefits, and risks of existing financial services, and you're also unable to use financial products or services to manage your personal finances. At this stage, financial education is essential to build understanding and trust.
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