What Is Financial Literacy?
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Not knowing the basics about your finances can cost you—big time.
In fact, lacking essential knowledge about money cost the average consumer more than $1,600 in 2020, according to the National Financial Educators Council, a nonprofit group devoted to achieving financial literacy.
Many people struggle with essential money concepts, including numeracy and compounding, not knowing how an interest rate affects the cost to borrow money, and whether it’s safer to invest in a single stock or a mutual fund.
How can you get up to speed with key money concepts? Start with some basics, including definitions.
What does financial literacy mean?
It’s a good question—what is “financial literacy”? It can be defined as “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.” In a nutshell, it means knowing how to make informed decisions about money. And the importance of financial literacy can’t be overemphasized: it can help you develop a budget, prepare for unforeseen expenses and emergencies, create a financial plan for the future, stay—or get—out of debt, and invest wisely for your retirement … just for starters.
Being financially literate also means you’re less likely to waste your cash or take unnecessary financial risks. It also means you can make measured decisions about creating money-related goals, like buying a car, paying for your kids’ tuition, or purchasing a home. And in a society that’s generally viewed as inequitable in terms of the forces that factor into the money circumstances of various individuals and families, knowing more about money can help you level the playing field.
Unfortunately, many people in the U.S. have not received a basic financial education, despite the fact that money plays an important role in most people’s lives.
Did you learn about money in school?
If you got through school without learning how to create a budget—or without learning that $200 charged on a high interest credit card can end up costing you $400+ if you don’t pay off the balance right away—you’re not alone.
You may have discovered as a student, parent, or guardian that teaching kids about money management isn’t a priority in most schools. In fact, the majority of states have no requirements for students to learn even rudimentary economics or financial planning, according to the Council for Economic Education. And many times, it can be difficult to figure out where to go to educate yourself.
What a lack of financial literacy can look like
Financial products, ranging from retirement accounts to mortgages and credit cards, have gotten increasingly complex—and a generation ago, there weren’t so many options for saving and investing. Now we just need to know a lot more.
Not so long ago, a collective lack of financial literacy helped lead us into the worst financial crisis since the Great Depression. Remember the housing crisis? Tens of thousands of people purchased houses they couldn’t afford and then defaulted on mortgages that were hard to understand.
Even today, consumer debt for things like student loans and credit cards keeps creeping up, with the average total debt per person totaling more than $90,000, according to a 2020 study by the credit bureau Experian.
At the same time, there’s a savings crisis—not enough people are regularly putting money away for emergencies or for their retirement. In fact, in a recent survey, more than 45% of respondents said they thought their retirement saving was not on track—not nearly what will be required for retirements that can stretch on for decades.
Additionally, the pandemic has worsened economic circumstances for many. While many white collar workers have been able to work from home, many others who work on the frontlines in health care and in the service sector haven’t.
So what can you do about all of this?
How to become financially literate
Fortunately, there are plenty of ways to get smart about your finances and give yourself the financial education you need—and deserve. But becoming financially literate takes time and practice, so go easy on yourself as you take steps to learn more about money.
Check your financial literacy
Here’s a quick checklist of questions that can help you gauge how you’re doing, no judgments.
If you answer “no” to one or more of these questions, it might be a good idea to brush up on your financial education—and beyond that, your financial health, which is how you put into practice what you know.
- Do you spend less than you earn?
- Do you always pay your bills on time?
- If you have debt, do you pay more than the monthly minimum?
- Have you created an emergency fund that can cover three to six months of expenses?
- Do you have medical and homeowners or renters insurance to insulate you from financial shocks?
- Have you created a retirement savings plan? (Pro tip: it’s never too early to start!)
- Do you know your credit score—and what it means?
Take a look at these financial literacy resources
- The federal government has a number of sites, including Mymoney.gov, created by the Federal Financial Literacy and Education Commission, a financial literacy partnership between dozens of U.S. federal departments and agencies.
- The Consumer Financial Protection Bureau (CFPB) has information on everything from auto loans and mortgages to student loans and buying a house.
- Stash101 is a simulated banking and investing platform for K–12+ teachers and students, with content coming soon specifically for parents/guardians and families.
- Tip: if you have kids in school, ask their teacher or principal if they’re using this platform—it’s free!
The takeaway on the importance of financial literacy
Getting smart about money is a lifelong process—and practice. By acknowledging the importance of financial literacy and taking steps to educate yourself about money, you’re moving in the right direction to get yourself on more stable financial footing now and in the future.
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