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Smart Money

What Is Financial Literacy and Why Is It Important?

Financial literacy isn't generally taught in school, but it’s never too late to learn about your finances and gain the knowledge you need for success.

Susan Shain • December 6, 2021

The goal of financial literacy is to help people better understand basic finances in order for them to manage their money better. There is an abundance of information out there to help educate you on your financial standing and a lot of topics to cover such as saving, investing, debt, budgeting, etc. Focusing on learning more about even some of these areas is going to help you achieve economic and financial stability over time. 

It’s a worthy goal to learn about financial literacy, especially when you consider some of this data:

  • 54% of Americans (125 million people) are living paycheck-to-paycheck.
  • The average debt for 18 to 23-year-olds in the U.S. is approximately $9,593.
  • According to the U.S. Bureau of Economic Analysis, the personal saving rate for August 2021 was 9.4%, a drop from the previous months.

Let’s not get discouraged already, but it’s important to be aware of what’s going on so that you can make the necessary changes and good choices when it comes to money moving forward. With a bit of basic knowledge, you will be making smart financial decisions about taxes, retirement, real estate, college, and more in no time

In This Article

  1. Financial Literacy Definition
  2. Why Is Financial Literacy Important?
  3. Financial Literacy Basics: 5 Steps to Take
  4. FAQs
  5. Final Thoughts

Financial Literacy Definition

Financial literacy is the ability to understand your money.

Jill Fopiano, CEO of O’Brien Wealth Partners LLC, explained that financial literacy is “the ability to understand and manage important areas of your finances so that you can meet your financial goals.” This includes financial jargon, too. For example, knowing the difference between a Roth and traditional IRA, or compound and simple interest, can significantly affect your financial future.

And don’t be misled by the word literacy. Although understanding stats and facts about money is great, no one has truly grasped financial literacy until they can regularly do the right things with money that lead to the right financial outcomes.

Let’s keep in mind that financial literacy is essentially being able to understand and effectively use a bunch of personal finance skills, such as money management, budgeting, and investing. Financial literacy sets the tone for your relationship with money, but it can’t be built in one cram session. It’s a great idea to start educating yourself today to set your future up for success.

Why Is Financial Literacy Important?

You may think personal finance is boring or insignificant. If your entire family is “bad with money,” you may even think you’re doomed to follow in their footsteps. But the truth is you can transform your life by learning basic financial concepts.

Here’s a real-life example of why becoming financially literate is super important. Most Americans used to receive post-retirement benefits from their employers, and today fewer than 20% of private sector jobs come with pensions. This means you’re responsible for having your money in order when you don’t feel like working anymore (or retiring).

And, this isn’t something that’s easy to do.That is why investments such as 401(k)s and Roth IRAs exist and are crucial to understand from a young age. 

In addition to affecting your future, financial illiteracy can harm you in the present, too. Acquiring huge debts, taking out loans with high interest rates, and lowering your credit score are all consequences you can face when not knowing your options or the right information on these topics. 

Take a look at the ways financial literacy can affect your life:

  • Tackling high interest rates — Finding the lowest interest rates when comparing loans or credit cards can save a lot of money over time, and so can paying off credit card balances each month so you don’t carry a balance and accrue more interest charges. 
  • Taking on huge debts — Repay and avoid debt. If you already have debt, financial literacy can help you choose the best methods to get out of debt, either on your own or with the help of a financial counselor or program. 
  • Protecting yourself from bankruptcy — A good way to prevent debt from building up is to create an emergency fund. A financially literate individual knows how much to set aside for certain expenses and aims to keep that pot of savings in good shape at all times, ultimately avoiding potential bankruptcy.

Now that you’re able to understand the major financial issues most people face like emergencies, debt, and credit, you can see how financially literate people can effortlessly avoid these mistakes, creating better financial circumstances for themselves.

This can mean diligently reviewing your credit card statements and addressing bad spending habits. Financial literacy also helps people save for important things in their life, such as retirement or a house. 

Financial Literacy Basics: 5 Steps to Take

Since most schools don’t require personal finance classes, it’s important to take your education into your own hands. Here are 5 steps to help you get started.

1. Devour Financial Media

Feel free to consume information in a way that works for you and your lifestyle. Maybe you like to listen to podcasts on your commute or maybe you’re more into watching videos on your days off. Whichever you prefer, there are tons of resources out there that can teach you financial literacy.

Here are some resources:

2. Take It Slowly

Financial literacy is like a tall mountain: You’re not going to reach the summit right away. The best you can do is take it slowly, tackling one topic at a time.

While you should get a basic grip of personal finance as soon as possible, don’t dive deep into every topic at once. That would be overwhelming, and could discourage you from progressing further.

Pick a topic that interests you or maybe one where you need the most help. Focus on that specific topic until you feel you’ve taken in all the information possible and are able to make better financial choices. Keep up that momentum, and you will be a finance expert in no time!

3. Ask For Help

You probably wouldn’t try to fix your plumbing on your own. Or try to learn chemistry without a teacher. The same goes for money. Although teaching yourself is a fantastic way to get started, you may eventually need some professional assistance, which is totally fine!

If you’re not ready for human help quite yet, turn to financial technology. Use Mint to create a budget and track spending, Charlie to monitor your finances as a whole, Credit Karma to track your credit scores, and Chime to help you grow your savings automatically.

4. Stay Curious

The key to financial literacy is, of course, taking the time to educate yourself.

If you dream of becoming financially secure and maybe even wealthy, you should make it your goal to keep learning. You should continue your education by reading about personal finance, seeking out resources that help your particular situation, and using technology that simplifies the process.

This is your money, after all, and it affects every single aspect of your life, so don’t give up the minute it all gets confusing. It’s easy to get overwhelmed; however, keeping your end goal in mind will keep you motivated and excited to learn.

5. Set Financial Goals

By becoming financially literate, you will understand and learn how to work on a lot of your goals at the same time. Knowing how to put funds toward savings and conquering debt repayment makes handling student loans and emergency funds second nature. 

Even if you don’t have a ton of extra money leftover in your monthly budget, becoming financially literate allows you to better prioritize your goals and take the right steps to achieve them.

Life happens and it’s normal to make impulse decisions that can negatively affect your finances. Now that you know how important setting goals are, you can create some of your own to work toward.

FAQs

What’s personal financial literacy?

Personal financial literacy is basically becoming financially literate for the benefit of your specific finances and circumstances. It’s great to know all of the information in the world related to money; however, it’s most important to first gain knowledge regarding the specific situations in your life. More definitive learning will help you implement strategies and tactics into your routine for better financial health. 

What’s something I can do today to start?

Start with something really easy that you could do on your own at any time and is free. That would be to make a budget by understanding how much you earn and spend. Once you have a budget, you can continue to track spending and revisit your spending plan regularly. There are several budgeting methods, so choose the one that works best for you. There are also several mobile apps to use to make budgeting even easier and more convenient. 

What’s the best online course to take to learn financial literacy?

A great course to start with is Finance for Everyone: Smart Tools for Decision-Making by edX. It’s free, self-paced, and you only need to dedicate a few hours a week to the course. It covers the basics of finance and teaches you about the tools you will need to achieve financial wellness.

What’s a good credit score to have?

Generally, credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.  A higher credit score usually means you have demonstrated responsible behavior in the past when it comes to finances, which is helpful when applying for credit cards or loans. As your score falls into those lower brackets, it may become difficult to qualify for particular loans and credit cards.

Final Thoughts

Becoming financially literate is a marathon, not a sprint, but you’ve got that by now. Being able to navigate the challenging world of personal finance is a hardship for many. When you’ve taken the time to educate yourself, the whole process becomes less intimidating and can even be fun.

Strengthening your finances eases a lot of stress and gives you more control over your money and life. And remember: as you are learning about financial literacy, try to pass on knowledge to your family and friends, so they can be a part of the journey.

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