What Is Financial Literacy?

Written by  Clifton D. Corbin

Everything You Need to Know About Financial Literacy.
What Is Financial Literacy

What Is Financial Literacy and How Can It Help You?

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Financial literacy is understanding and using financial knowledge and skills to make informed decisions about your money. That includes everything from budgeting and saving to investing and retirement planning. 

A lack of financial literacy can have serious consequences. For example, it can lead to poor money management, high levels of debt, and even bankruptcy. Therefore, financial literacy is, essential for individuals and families to manage their money wisely and achieve financial security.

This article will discuss everything you need to know about financial literacy and why it is a life skill everyone should acquire.

Table of Contents

What Does Financial Literacy Mean?

Financial literacy is your ability to understand and use financial concepts. Unfortunately, no standardized metric defines a person’s financial literacy. Since financial literacy is about your ability to understand money management concepts, companies and institutions establish a person’s financial literacy by asking several questions related to interest, saving, and other money concepts. Your level of financial literacy will vary depending on how well you answer the questions.

What Does Financial Literacy Mean

A person’s financial literacy will typically increase with experience. But, unfortunately, experience alone may not be enough to best prepare you to manage your money in the most efficient ways. For example, many people get exposure to earning and likely saving money, giving them ample opportunities to learn how to do those two components of financial literacy better. But not everyone will be exposed to investing, insurance, budgeting, taxation minimization strategies, estate planning, or credit and debt management. So, for many, the only way to improve their level of financial literacy will be to seek out additional knowledge.

Financial Literacy vs. Personal Finance

Many people use financial literacy and personal finance interchangeably, but they have different meanings. Personal finance is the process of planning and managing financial activities such as income, spending, savings, and debt. It aims to make the most of your money and improve your financial well-being.  

On the other hand, financial literacy is your ability to understand and use financial concepts like compound interest, wealth creation, and protection.

In other words, you should apply your financial literacy (understanding of financial concepts) to your personal finance (managing your money) to reach your financial goals.

Why Is Financial Literacy Important?

While financial literacy is not required to live a comfortable life, it can have a massive impact on all stages of your life. Those who are financially literate are more likely to save, pay less in fees, and stress less about money. Additionally, folks with high financial literacy tend to reach their financial goals more easily.

The opposite is unfortunately also true. Those less financially literate tend to save less, pay more in fees, and are less able to manage financial emergencies. These folks are also more likely to report feelings of stress and anxiety because of money.

Is Financial Literacy Required?

Unfortunately, since all schools are not required to teach financial literacy, many people are considered financially illiterate. Someone financially illiterate may need to gain the basic knowledge necessary to make informed financial decisions. Poor credit scores, high levels of debt, and a greater challenge in managing financial emergencies have all been linked to a lack of financial literacy.

Many financial literacy advocates believe students should take financial literacy courses. But as of this writing, only some states have made completing a financial literacy course a requirement for graduation.

Teaching financial literacy in schools would help to improve the overall financial health of the population.

Is Financial Literacy Required

What Does Financial Literacy Include?

Financial literacy is the ability to read, understand and use financial information to make sound financial decisions. It includes an understanding of basic financial concepts, such as: 

  • Saving and investing
  • Earning, income streams, and cash flow management
  • Banking and securing money
  • Money management and spending wisely
  • Credit and debt management
  • Maximizing interest
  • Building and living on a budget 
  • Practicing gratitude and appreciation
  • Financial goal setting

Understanding complex financial concepts

Financial literacy also involves the ability to understand more complex financial concepts, such as:

  • Wealth management
  • Estate planning
  • Taxation
  • Retirement planning
  • Insurance

 

To be financially literate, you need to understand where your money comes from and where it goes. In addition, some understanding of the economy is also an asset when it comes to your financial literacy. 

A solid financial literacy foundation can help you manage your money to stay out of debt and make wise choices about spending and saving. It can also help you take advantage of investment opportunities while protecting yourself from fraud and scams.

How Can Financial Literacy Be Achieved?

There are many ways to improve your financial literacy. Here are a few ideas:

  1. Read books or articles on personal finance. Books are a great resource to help you dive deep into any one subject or to help you get a better overview of financial literacy as a whole.
  2. Take a class or participate in a workshop on financial literacy. Structured courses can help build your understanding of financial concepts with the aid of an instructor.
  3. Use apps or other tools to help you manage your money. Money management apps and online tools like interest rates, mortgages, or even investment calculators can help to hone your understanding of how money works in our economy.
  4. Seek help from friends, family, or financial advisors. Asking for help is one of the best first steps when trying to learn something new. Knowledgeable people are often willing to share what they know.

What Are the Benefits of Being Financially Literate?

There are many benefits to being financially literate. First, it can help you make better decisions about how to best use your money by understanding financial concepts. This can help you save money and avoid expensive mistakes.

What Are the Benefits of Being Financially Literate

People with higher levels of financial literacy are more likely to save and invest more, be more prepared to manage financial emergencies, and often have less financial anxiety than those with lower levels of financial literacy. Unfortunately, folks with less financial literacy are more likely to pay more fees and succumb to financial scams than their high financial literacy counterparts.

Financial literacy can also help you plan for your future. By understanding how to manage your finances, you can set yourself up for success in the future. For example, you can create a budget that allows you to save money for retirement or other long-term goals.

What Is an Example of Financial Literacy?

Example 1

What: Use compounding interest to your benefit.
Why: The compounding of interest can earn you significant returns on your investment over time, helping you reach your financial goals faster. Understanding how interest compounds can also help you avoid paying more on debt.
How:
1. Invest early and for the long term.
2. Do not withdraw your investment if at all possible.

Compounding interestFinancial Literacy Resources for Parents

There are a variety of financial literacy resources for parents. Here are a few:

  1. Social Media. Be careful to follow trustworthy sources, but some fantastic creators provide a wealth of parental information. Here are a few of my favorites:
  1. Books. There are many excellent books on financial literacy. Here are three that are just for parents:

Reading books to your kids

Reading books to your kids is also a great way to learn while you teach. Here is a list of books that are great for kids:

  1. Online Courses. If you’re looking for a more comprehensive approach to learning about personal finance, there are many online courses available, such as 

Financial Literacy FAQ

What does it mean to be financially literate?

Being financially literate means, you have the knowledge and the skills to manage your finances effectively to reach your financial goals.

What is personal financial literacy?

This is likely a mistaken combination of two different terms, personal finance and financial literacy. Personal financial literacy is not currently a recognizable term or phrase, and therefore has no meaning.

When is financial literacy month?

Financial literacy month is April in the United States and the United Kingdom. Canada celebrates financial literacy month in November.

Is financial literacy important for black youth?

Yes, financial literacy is crucial for black youth. Financial literacy is one tool to help mitigate the racial wealth gap. It is not the solution, but it can help.

Is financial literacy a math class?

Many math concepts are part of financial literacy, but some concepts may fit better as part of an economics or business class. For example, understanding interest rates and when they may rise or fall is a macroeconomic concept that directly impacts financial literacy. Therefore, which subject financial literacy belongs to is less critical than the concepts being taught and learned by the students.

Is financial literacy taught in schools?

Some schools do teach financial literacy, but at the time of this writing, only 50% of the states required the completion of a personal finance class for graduation.

How do you become financially literate?

You can learn by managing your finances, taking classes, or reading books and articles.

Social media

Conclusion: The Importance of Financial Literacy

Financial literacy is the ability to understand and use financial concepts. It includes money management, investing, and budgeting. Financial literacy is vital for everyone, but it is crucial for young adults starting out in the world.

There are a variety of ways to become financially literate. One way is to take courses or attend workshops. Another way is to read books or articles or listen to podcasts about personal finance.

Becoming financially literate can help you make better money decisions, whether saving for a rainy day or investing for retirement. It can also help you avoid costly mistakes that could set you back financially.