Financial Literacy

Financial literacy summary:

• Financial literacy is a set of skills and knowledge that helps people understand various aspects of managing money . 

• People who are financially literate have a good grasp of saving money, investing, and building wealth over time. 

• Financial literacy can be a factor in avoiding unmanageable debt and feeling more confident about your money.

Financial literacy definition and meaning

Financial literacy is the skills and knowledge that help people make smart, confident decisions about money. Those decisions typically relate to budgeting, savings, investing, and debt. 

Key concept: A set of skills needed to handle money wisely.

More on financial literacy

Financial literacy is a catch-all term that covers a range of skills. People who know how to manage money tend to make good choices about money, whether it's investing, spending, or managing debt. They understand the importance of saving, setting goals, and taking steps to grow their wealth over time. 

Financial literacy: a comprehensive breakdown 

When you’re financially literate, it’s easier to take control of your finances and feel you can reach your financial goals. Financial literacy could also help you cope with money-related challenges that may crop up. For example, if you save for emergencies, it's easier to deal with losing a job or unexpected costs. 

Some people learn financial literacy at home by observing smart financial behaviors. Others develop financial literacy skills on their own by reading about topics like budgeting, debt, and investing. You could also improve your financial knowledge by talking to friends and family who are good at managing their money.

The importance of financial literacy is on the rise. More than 30 states have some financial literacy requirements for high school students. That hasn’t always been the case—and many adults had to figure out money skills on their own.

Here are some key skills needed for financial literacy:

• Set up and follow a budget

• Recognize the importance of emergency savings

• Know how to say no to large expenses that could create financial hardship

• Understand how to invest and develop an investment strategy

• Keep debt manageable and understand the difference between good debt and bad debt

• Understand the importance of good credit, and know how to accomplish a strong credit score

• Have the ability to cope with financial shakeups

• Establish realistic financial goals and forge a path to get there

Real-life example of financial literacy

Jessie earns $67,000 a year and has $8,000 in credit card debt. Jessie would like to get rid of the debt and also hopes to buy a house someday. After some research, Jessie decides that a debt consolidation loan would be a good strategy to pay off the credit card balance in five years. Jessie also decides that emergency savings could help her avoid running up credit card bills, so she sets up a $5 a week autopayment to a high-yield savings account. 

Jessie’s company has several employee benefits. When Jessie started her job, she didn’t participate in the company retirement plan, but now she’s interested in saving more and learning to manage her money better. Jessie decides to join the 401(k) plan and save 3% of her salary.
Jessie could be considered financially literate because she’s paying attention to her finances as she: 

• Makes a plan for debt payoff 

• Sets long-term goals

• Saves in an emergency fund

• Takes advantage of company benefits 

• Works out strategies to reach her goals