Understanding Financial Literacy

Financial literacy is the ability to understand and effectively apply various financial skills, including personal financial management, budgeting, and investing. Financial literacy helps individuals become self-sufficient so that they can achieve financial stability.

KEY TAKEAWAYS

  • Financial literacy is the ability to understand and properly apply financial management skills.
  • Effective financial planning, properly managing debt, accurately calculating interest, and understanding the time value of money are characteristics of being financially literate.
  • The primary principles of financial literacy include learning how to budget, track spending, effectively pay off debt, and properly plan for retirement.
  • Financial illiteracy contributes to people making poor financial decisions and becoming victims of abusive financial practices

Financial literacy also involves the proficiency of financial principles and concepts, such as financial planning, compound interest, managing debt, profitable savings techniques, and the time value of money. The lack of financial literacy may lead to making poor financial choices that can have negative consequences on the financial well-being of an individual. Consequently, the federal government created the Financial Literacy and Education Commission, which provides resources for people who want to learn more about financial literacy.1

The main steps to achieving financial literacy include learning the skills to create a budget, the ability to track spending, learning the techniques to pay off debt, and effectively planning for retirement. These steps can also include counseling from a financial expert. Education about the topic involves understanding how money works, creating and achieving financial goals, and managing internal and external financial challenges.