Definition of Financial Literacy

This time we will discuss the meaning of financial literacy along with aspects, levels and measurements of financial literacy. Here’s the explanation …

 

Table of contents :

Definition of Financial Literacy

Financial Literacy Aspects

Financial Literacy Level

Financial Literacy Measurement

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Definition of Financial Literacy

Financial literacy is the level of knowledge, skills and public trust regarding financial institutions and their products and services as described in the index measure parameters (Otoritas Jasa Keuangan, 2014).

 

Financial literacy is very important for someone in making decisions, especially those related to daily activities

 

such as in making decisions to save (invest) or invest (invest) to achieve predetermined goals.

 

Financial literacy is not only beneficial for individuals themselves but also for the sustainability of a country’s economic system.

 

The following are some definitions of financial literacy from several book sources:

 

According to the Indonesian National Financial Literacy Strategy (2013: 80)

 

Financial literacy is a series of processes or activities to increase the knowledge, confidence (skills) and skills of consumers and the wider community so that they are able to better manage finances.

 

According to Mitchell

 

The definition of financial literacy is a person’s strengths to process information in the economic field that is obtained and make decisions to make financial planning, financial accumulation, pensions, and debt (Farah and Sari, 2015: 134).

 

According to OJK (2014)

 

Financial literacy, namely insight, skills, and beliefs, which influence attitudes and behavior to improve the quality of decision making and financial management to achieve prosperity.

 

According to Hudson, Kaly and also Vush (2008)

 

Financial literacy is the ability to read financial conditions and financial concepts and to transform that knowledge appropriately into behavior (Widyawati, 2012).

 

understanding of financial literacy

 

Financial Literacy Aspects

According to Chen and Volpe, financial literacy is divided into four aspects, namely as follows (Ulfatun et al, 2016: 4):

 

Understand some things related to basic knowledge of personal finance.

Savings and borrowing (savings and loans), this section covers knowledge related to savings and loans such as the use of credit cards.

Insurance (insurance), this section includes basic knowledge of insurance, and insurance products such as life insurance and motor vehicle insurance.

Investment (investment), this section includes knowledge of market interest rates, mutual funds, and investment risk.

Also Read:   Understanding Currency Exchange

Financial Literacy Level

According to the Financial Services Authority (2014), a person’s financial literacy level is divided into four types, namely:

 

Well Literate. Stage a person has knowledge and confidence in financial service institutions and financial products and services, including features, benefits and risks, rights and obligations related to financial products and services, and has the skills to use financial products and services.

Suff Literate. Stage a person has knowledge and beliefs about financial service institutions and financial products and services, including features, benefits and risks, rights and obligations related to financial products and services.

Less Literate. Stage a person only has knowledge of financial service institutions, financial products and services.

Not Literate. Stage a person does not have the knowledge and belief about financial service institutions and financial products and services, and does not have the skills to use financial products and services.

Financial Literacy Measurement

Financial literacy is reflected in one’s cognitive knowledge and financial abilities.

 

According to Remund (2010: 45), there are four most common things in financial literacy, namely the ability and knowledge of savings, budgeting, investment and loans.

 

The Financial Literacy variable broadly measures a person’s ability with respect to understanding exchange rates, features of financial services, financial records, and attitude in financial issuance.

 

According to Widayat (2010: 76), there are several things in measuring financial literacy, namely:

 

Develop / plan a budget of income to be received.

Compile / plan budget costs that must be spent.

Compliance with expenditure budget plans.

Understand real money value.

Understand the face value of money.

Understanding inflation.

According to the Australian Securities & Investments Commission, to find out how much a person’s financial literacy level can be used the following knowledge steps (Yunikawati, 2012: 61):

 

A person’s knowledge of the value of an item and the priority scale in his life.

Budgeting, savings, and how to manage money.

Credit management.

The importance of insurance and protection against risks.

Investment basics.

Retirement planning.

Take advantage of shopping and comparing products to where to seek advice and information guidance, and additional support.

How to recognize potential conflicts over utility (prioritization).

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