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Financial Literacy: Definition, Benefits, and Levels

Admin BFI
19 August 2022
Financial Literacy: Definition, Benefits, and Levels

Talking about financial literacy, many of us are certainly familiar with this term.

In the past few years, the government has diligently promoted financial literacy, both through financial institutions and direct counseling in formal institutions such as schools, universities, and so on.

Even so, in fact, not a few of us are still confused in understanding what real financial literacy is.

Therefore, in this discussion, the BFI Finance Team has succeeded in summarizing the important points you need to know about financial literacy. Let's talk more about it in this article.


1. Understanding Financial Literacy

Financial literacy is knowledge and skills in managing finances. The existence of this awareness has a long-term effect that can maintain a stable, safe, and prosperous financial condition.

Financial literacy is not only important for individuals but also influences the economic progress of a country. That is why one indicator of a country's progress is marked by public awareness of the importance of financial literacy.

Quoted from the Financial Services Authority, financial literacy has 3 important aspects. These three aspects include:

1. Knowledge

This means that an individual has adequate knowledge or information about financial service institutions, risks, rights and obligations of consumers, and others.

2. Skill

Skills or skills indicate that the individual is able to apply the knowledge he has to manage finances. For example, taking into account risk, calculating interest, and others.

3. Confidence

This means that there is a sense of trust in the money that is channeled to be processed by a trusted financial institution or service. In accordance with the instrument of choice and existing conditions.

In addition to the 3 aspects described by OJK, there are also 2 other important aspects that were put forward by the experts. Are as follows.

1.1 Aspects of Financial Literacy According to Chen and Volpe

1. Understanding of Basic Knowledge of Personal Finance

Understand basic knowledge or information about your own finances.

2. Savings and Borrowing

The second aspect includes knowledge of savings and loans. One example is the use of credit cards.

3. Insurance

Understand basic information about insurance and its types. For example health insurance, life insurance, vehicle insurance, and so on.

4. Investment

Have an understanding of investment and everything related to it. For example, knowledge of investment risk, investment products such as stocks, bonds, mutual funds, and others.

1.2. Aspects of Financial Literacy According to Nababan dan Sadalia

1. Basic Personal Finance

Basic understanding of own financial literacy. For example, knowledge of liquidity, inflation, assets, simple interest, compound interest, time value, and others.

2. Money Management

How a person manages their finances. The better the understanding of financial literacy, the better the way that person manages their finances.

3. Credit and Debt Management

That is the activity of systematically collecting information related to credit at a bank or finance company and being able to manage it properly.

4. Saving and Investment

Savings is part of the funds that are not used for consumption activities. While investment is part of the savings allocated for things that produce goods or services. For example, the existing money is invested to buy stocks, P2P Lending (Peer to Peer), bonds, deposits, and much more.

5. Risk Management

Risk is a consequence that exists because of uncertainty. This can be overcome easily if someone has good risk management.

Having a good understanding of risk can minimize losses and optimize the profits you can achieve. Especially for those of you who buy financial products such as stocks or bonds.

2. The Importance of Studying Financial Literacy

Financial literacy has a number of good benefits for you, especially for future welfare. The benefits include the following.

2.1. Able to Manage Finances Well

With qualified financial literacy, it will be easier for us to manage finances in such a way. This includes managing monthly cash flow, setting up emergency funds, insurance, and investing.

In short, if we understand financial literacy well, it will not be difficult for us to choose a strategy and make the right decisions regarding our financial affairs. It also affects your financial wealth a little bit.

2.2. Wisely in Using Finances and Becoming Prosperous

If we have sufficient skills in managing finances, such as in financial products and services, our standard of living can improve significantly because we are able to use them well.

2.3. Avoid Fraud

With the provision of sufficient literacy knowledge, it is less likely that someone will be entangled in fraud. Some examples of fraud that are quite common include cases of Ponzi Schemes, Monkey businesses, Illegal Loans or Stupid Investments, and others.

2.4. Distribution of Wealth

Finally, the existence of financial literacy can have a positive impact on the general public at large. This is because rich people prefer to invest their money in financial institutions. The money will then be processed into financial products and services that can be used for good things, one of which is opening a business.

3. Financial Literacy Level

The Financial Services Authority (OJK) divides financial literacy levels into 4 types. Among them are:

3.1. Well Literate

At this level, the individual has a good knowledge of finance. Among other things, knowing financial products and services, and having trust in financial service institutions.

Not just knowing about financial products and services. Those who fall into this category have good skills in using existing financial products. So that it can make him more prosperous.

3.2. Sufficient Literate

At this level, a person has knowledge and confidence in existing financial service institutions and financial products. They know all the risks, obligations, and benefits that exist in financial products.

3.3. Less Literate

At this level, the individual only has knowledge about products, services, and institutions. However, they do not yet know how to manage and use financial products and services properly.

3.4. Not Literate

At this level, individuals do not have enough knowledge and confidence in products, services, or financial institutions. In other words, the person also does not have sufficient skills in managing his personal finances.

Literasi Keuangan

Image Source: Bady Abbas

4. Example of Financial Literacy

Consciously or not, financial literacy is very closely related to our daily lives. Examples are as follows.

1. Various types of savings

The presence of various types of Banks and Financing Companies is an indicator that awareness of financial literacy is really present around us. It's as simple as awareness to save and borrow money as business capital.

2. The public is increasingly aware of the importance of participating in the financial sector

The existence of financial literacy has influenced the public to realize the importance of participating in the financial sector that can benefit them.

3. There is awareness of saving or investing from an early age

Many people realize the importance of managing their finances as early as possible so that in old age they are able to enjoy life well.

4. Able to use debt for productive activities

Debt doesn't always have a bad meaning. If done right, debt can actually benefit us. For example, in debt to start a business or start a business.

5. Improving the standard of living and welfare

Having qualified knowledge related to financial literacy will help anyone to be more skilled in managing their finances. One of them is planning and knowing how to take advantage of financial products and services.

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Sobat BFI, that's information about Financial Literacy: Definition, Benefits, and Levels. The hope is that this article can help all readers to understand financial literacy as well as possible.

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