Financial Literacy: What it is and Why It’s Important


Financial literacy. It’s a skill everyone should have. And if you are interested in managing your money effectively, it’s something you definitely should learn more about.

This article will delve into financial literacy to give you an idea of what it is, why it’s important and how it can help you become more financially savvy. 

The Best Definition of Financial Literacy Is

Financial literacy is defined as a set of skills and knowledge that allows an individual to make informed and effective decisions regarding their financial resources. It includes the ability to manage personal financing, money and investing. It also involves knowing how to make decisions concerning investments, insurance, real estate, paying for college and other major investments as well as budgeting, retirement and tax planning. 

Becoming familiar with financial principles and concepts like financial planning, compound interest, debt management, savings techniques and the value of money in terms of time are other important aspects of financial literacy.

Financial literacy is important as it can help a person avoid making unwise financial decisions that can have devastating consequences. 

Financial literacy can be achieved in several ways, but the main steps will be learning the skills that are necessary in creating a budget, tracking spending, learning how to pay off debt and retirement planning. 

Becoming educated in financial literacy will involve gleaning a general understanding of how money works, how to achieve financial goals and how to deal with internal and external financial challenges. It may also involve counseling with a financial expert.

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Why Financial Literacy is Important

Financial literacy is important on a number of levels. Here are some examples of how it can come in handy.

  • Helps an individual achieve financial stability 
  • Helps us make smart decisions about purchases, i.e. whether an item is needed, whether its affordable and whether it’s an asset or liability
  • Helps us identify the amount of money we earn, spend and owe
  • Comes into play in business matters helping entrepreneurs determine what decisions will be advantageous and what should be avoided.
  • Protects us from becoming victims of scams like predatory lending, subprime mortgages, fraud and high interest rates that can lead to bad credit, bankruptcy and foreclosure
  • Help us understand the global economy that affects the U.S. economy

Financial literacy is very important, yet, based on research provided by the Financial Industry Regulatory Authority, 63% of Americans are financially illiterate. They are unable to reconcile their bank accounts, pay their bills on time, pay off debt and do any sort of future planning.

How is Personal Financial Literacy Different?

Personal financial literacy differs from financial literacy in general in that it only refers to the skill sets needed to keep us, as individuals, on track financially. It does not include a knowledge of the global economy, and if you are not an entrepreneur, it will not encompass financial business matters.

Personal financial literacy includes the following: 

  • Earning an income
  • Understanding taxes
  • Managing a bank account and other financial services
  • Saving and investing
  • Planning for retirement
  • Understanding loans including student loans, predatory lending and payday loans
  • Understanding credit card debt, interest and online commerce
  • Identifying fraud and theft
  • Learning the rights and responsibilities that come with renting or buying a home
  • Understanding insurance
  • Understanding the financial impact of gambling 
  • Bankruptcy 
  • Charitable giving

These all play an important role in keeping people financially secure and protecting their money and investments. In some states, this is a mandatory part of the 7-12th grade school curriculum.

Some Financial Literacy Examples

There are plenty of ways financial literacy can play out in our every day lives, in business and when we are working on long term planning. Here are some examples: 

Invest Your Income in Retirement: You can start a retirement fund by using good growth stock mutual funds in a tax-advantaged retirement savings plan like a 401(k) or Roth IRA. If you invest 15% of your income, you will beat inflation while still having enough for future income and to pay off your home. 

Save For College: It’s a good idea to start saving for college early. Students can look into their options. Education Savings Accounts (ESAs) and 529 plans are recommended. 

Pay off Your Mortgage Early: A mortgage payment is one of the biggest expenses most people have. If you budget your finances to pay off your mortgage early, it will free up a lot of money for future use.

Investing In Real Estate: Learning how to invest in real estate is a great way to get big tax advantages and build a stable monthly income for retirement.

Financial Independence, Retire Early Movement: The FIRE movement is very popular among young adults these days. It involves living a very minimal lifestyle with extreme savings of your income. You can also invest in stocks and real estate with a FIRE based strategy.

Some Interesting Financial Literacy Statistics

Here are some financial literacy statistics that may interest you.

  • Nearly four out of every five workers in the United States live paycheck to paycheck
  • Almost 75% of Americans are in some sort of debt and assume they always will be 
  • Only 39% of Americans would be able to cover a $1000 emergency if one happened to them. 
  • 40% of Americans wouldn’t be able to cover a $400 emergency if one happened to them.
  • Mortgages amount to nearly $9 trillion of nationwide debt.
  • The total consumer debt in America in 2018 equaled $3.95 trillion
  • Less than half of American participants were able to pass a 30-question test that covered things like budgeting, paying bills and setting financial goals
  • Finance courses are now being offered in high schools to boost financial literacy
  • 51% of students who learn about finance in high school plan to pay for college themselves.

Some Financial Literacy Discussion Questions

Because there is such a deficit in the field of financial literacy, parents, teachers and students are being encouraged to communicate about financial matters to try and raise awareness. Here are some examples of questions that might come up during these discussions. 

Here are some examples of questions kids can ask their parents:

  • What is the cost of living?
  • Has money ever caused you stress and how do you handle it?
  • Have you made any purchases you regret?
  • If you could give your younger self financial advice, what would it be? 

Similarly, teachers and parents can open discussions with kids on the following subjects:

  • What does it mean to keep up with the Joneses? 
  • Is it easier to spend money today than it was in the past? Why?
  • What do you think the future of money and currency will be like? 
  • What do you think are some good ways to save money?

Some Important Financial Literacy Lessons

If you are building a curriculum to teach a child or student about financial literacy, here are some important lessons you will want to include: 

  • Making Personal Finance Decisions: Start with an overview of the decision-making process and discuss how internal and external factors can affect those decisions.
  • Making Money: Students can learn what jobs suit their interests while providing employment opportunities.
  • Art of Budgeting: Students will be encouraged to come up with realistic financial goals, a time-frame to reach their goals and the actions that need to be taken to do so. 
  • Living on their Own: Students will learn how to transition from living with their parents to living on their own on an economic level. 
  • Buying a Home: Students will become familiar with the home-buying process and learn the benefits and disadvantages involved in the buying vs. renting debate.

Common Financial Education Programs and Grants

There are many financial education programs and grants available to those who wish to learn more about finances or pursue a career in finances. Here are some examples. 


  • The Alfred P. Sloan Foundation provides grants to support to original research and broad-based education related to science, technology and economic performance. Grants are available nationwide.
  • Bank of the West: This institution considers requests for charitable investments from nonprofit organizations that quality under charitable giving categories including financial management training and education programs.
  • Chase Global Philanthropic Approach: The approach has evolved for today’s environment to provide grants that cover asset building and financial literacy.

Financial Education Programs

National Financial Educators provides several financial education programs including financial literacy programs for the poor, financial job training and certification and more. 

The FDIC provides a Money Smart financial education program that can help people of all ages enhance their financial skills.

In Charge Debt Solutions provides resources for financial education including budgeting and saving, free resources for teachers and personal finance workshops and workbooks.

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Financial Literacy Needs vs. Wants

Part of financial literacy is being able to distinguish between financial needs and wants and how to budget accordingly for each. 

Needs are the things that you need to live and include the following:

  • Housing
  • Transportation
  • Insurance
  • Utilities
  • Food

      Wants are things you want to have but don’t need. These can include: 

  • Travel
  • Entertainment
  • Designer clothing
  • Gym membership
  • Coffeehouse drinks

Experts recommend that households divide their income in a 50/30/20 split dedicating 50% of their income to things they need, 30% to things they want and 20% to savings.

Loans and Financial Literacy

No matter how much we might try to avoid them, loans are something that may become necessary to us at some point in our lives. Mortgages, student loans, auto loans, personal loans and small business loans are all available and they are sometimes unavoidable.

Loans aren’t all bad as they can be helpful in some situations, but many people encounter pitfalls by taking out loans they can’t afford to pay back. This is likely to happen if the person does not have the financial literacy that makes them capable of understanding the loan. 

Before taking out a loan, it’s a good idea to do as much research as possible to familiarize yourself with the terminology, determine loan amounts and interest rates that are reasonable as well as what you can afford. You may also want to speak to a financial advisor before making a decision.

Financial Objectives and Outcomes

There are many financial objectives and outcomes that someone can strive for in their personal and professional lives. 

In your personal life, you may just want to have enough money to live comfortably. Others will invest their money to accrue wealth. 

A business will have business-oriented goals that includes increasing revenue while reducing overhead expenses and cost of goods sold. They will also want to have a healthy cash flow and a high Return on Investment (ROI) and Return on Capital (ROC). A healthy ROI and ROC will mean that their investments are paying off.

Financial Literacy Resources and Websites, Reddit Questionnaire for Teachers and Adults 

If you are looking to increase your financial literacy or if you are looking to help a child or student become more financially literate, there are plenty of online resources available.

Here are some that are recommended: 

  • BizWorld: This is a nonprofit that inspires children to be innovative leaders through the teaching of business, entrepreneurship and finance. 
  • My This is a U.S. government web site that teaches people of all ages the basics of financial education.
  • VISA’s Practical Money Skills for Life: This educator developed and approved program has been effectively used on students nationwide.
  • NEFE: The NEFE is a nonprofit foundation that is dedicated to inspiring individuals and families to make smart financial decisions at every stage of their lives. 
  • St. Louis Federal Reserve: This is a free classroom resource for educators of grades K-16. It is designed to teach children about banking, economics, personal finance, and the Federal Reserve.

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Final Thoughts

Financial literacy is so important. It can come into play when making small or large purchases, in keeping track of your money, running a business and more.

Hopefully this article has provided information on the basics of financial literacy, the benefits of financial literacy and the resources you need to apply financial literacy in your life. We wish you the best in making smart decisions that will keep your wallet nice and fat.

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