The importance of Financial literacy
Bulgaria is one of the countries in Europe with the lowest levels of financial literacy. This is shown by a number of studies conducted in the years since the end of the communist regime in 1989. One of the most recent studies on the subject ranks our country 72nd in the world in the company of countries such as Sri Lanka, the Dominican Republic, and Gabon. Within the European Union, the average level of a financially literate population is 52%, and in Bulgaria, this percentage is only 35%.
What is the problem with the lack of financial literacy?
But we can guess the low level of financial literacy in the country by looking around. It is no coincidence that in the 90s of the last century in our country all sorts of financial schemes and frauds flourished, depriving thousands of their already scarce savings. This is not an accidental development and is due to some extent to the lack of adequate regulatory control mostly. But the biggest reason for the low financial literacy in our country is the tragic or even completely absent level of financial education within the educational system inherited from the communist era. However, the importance of financial literacy should not be underestimated. A basic understanding of finance is necessary so that we can adequately orient ourselves in the implementation of basic activities of our daily lives, which should be understandable to everyone.
Paying taxes, choosing a bank, opening and managing a bank account, taking out a mortgage loan, taking out any other loan are basic activities, which, however, suddenly become extremely difficult for a financially illiterate person. Not to mention activities such as investing the savings we have accumulated. Which, by the way, we are not able to accumulate without being financially literate. Are you beginning to understand the importance of financial literacy? It is relevant to every aspect of our lives.
Money or life? The answer is – both
If you do not know how to control your money, they will control you. This is the most fundamental dependence of finance, especially personal finance. We need financial literacy to be able to control our money. To know how to optimize the use of this money. This is not about deprivation. It’s about optimizing our spending so that we can get the most out of our personal finances.
It is very easy to find out if you control your money or they control you, just ask yourself the following. Do you know how much money you spend per day? Do you know how much you spent last time in the store? In the restaurant? What is your cost allocation? How much do they go for food, how much for housing bills, how much for rent, how much for entertainment? And for healthcare? What is your biggest monthly expense? Do you have money set aside in case of an urgent need – medical or if you lose your job?
If you do not know the answers to these questions, or at least most of them, then you have no control over your personal finances. And as you can see, these questions concern fundamental elements of your daily life, of your life. Paying bills, shopping, entertainment, personal health – this is literally your life. If you do not know exactly how much and how you spend your money, then you simply have no control over your life.
Taxes, loans – an unpleasant but inevitable part of life
The usefulness of financial literacy extends beyond our personal lives. For example, how many of you know how taxes work? Do you know how much you pay each month to the state in the form of various taxes and insurances (WHY you pay them is another matter)? Do you know the difference between your gross and net salary, ie. your salary before taxes and insurances and after they are paid? Do you know how the banking system works? Do you know what a credit rating is and are you aware that you have a personal one and every bank takes it into account when approving you for its credit services (borrowing and the like)?
Without a clear answer to these questions, it is extremely difficult to control your personal finances. What happens in your wallet is directly related to the way the tax and banking system of the country in which you live works. In some situations, for some people who avoid loans, understanding how the banking system works is not so critical. However, taxes and social security are inevitable. We all pay them, and not just once a month when we receive a salary. We pay for them every day, even with our shopping in the store or meeting for a beer with friends. For reference, visit the website https://www.kolkodavam.bg/ where you can see how much taxes you pay personally, with your specific income level and your specific life habits.
Even if you avoid taking out loans (which, in principle, is a reasonable approach), knowing the banking system is necessary just to understand what is happening with your money. Nowadays, there is no person who does not have to use at least the deposit services of the banking system. But did you know, for example, that every time you put money in your bank account, you actually lend to the bank? Did you know that on the basis of this money and money from other current accounts the bank grants loans? Have you ever heard the term “partial reserve banking”, which refers to the way the modern banking system works? These are basic things. Not to mention some more advanced concepts such as credit rating. Lack of adequate knowledge of the banking system can be disastrous because at least one of the most important decisions in your life – buying a home – will almost certainly be tied to taking out a mortgage.
Need to understand the world we live in
So far I have mentioned absolutely nothing about investing. The reason for this is that without having the answers to all the questions I asked above, you are not ready to invest. Without knowledge of the basics of personal finance, which is necessary to control your money, investing is a pointless, even dangerous endeavor. Like building a house without first laying a solid foundation, if you invest without controlling your expenses, without having enough money saved, without optimizing your tax and credit obligations, the whole endeavor can collapse on your head. And even ruin you.
The purpose of this article is to make you ask a simple question – am I aware of what happens to my money at every moment of my life? This question, as it should already be clear, is far from as simple as it seems at first glance. Finding his answer may seem tedious, but it is certainly a very rewarding endeavor. After all, without financial literacy, we are simply unable to understand either our personal lives or the world in which we live. And in order to be able to manage something, you must first understand it.
Georgi Vuldzhev is the editor-in-chief of "ЕКИП" and a member of the management board of Bulgarian Liberty Society. His articles on economic and political topics have been published by both Bulgarian and international publications such as the Mises Institute, the Foundation for Economic Education, European Students for Liberty, and others. He has worked as an economist at the Institute for Market Economics and is currently an economic analyst at CEEMarketWatch. He was also a weekly investment columnist for the Tavex blog.