“Financial literacy” may sound like some heavy-duty brainiac term — but honestly, all it means is how you make your financial decisions based on what you know about money. The “literacy” part isn’t about reading; it’s about understanding basic concepts that are core to how money works. And understanding how money works is critical in making all kinds of decisions that have both short- and long-term impacts on your financial stability — and your life.
Why do I need financial literacy?
You want to work on your financial literacy so that you are able to make informed, sound decisions about money in your life. But like many things in life, financial literacy isn’t a one-and-done kind of learning; you will keep working on it your whole life.
And aside from the obvious benefits of being able to make smart decisions about money – keeping yourself out of too much debt, being able to be financially stable — there are also positive health ramifications. Since money is Americans’ number-one stressor, it’s obvious that if you can master basic money skills that you would also be lowering your stress.
Financial literacy can help eliminate that stress, by giving you skills and knowledge that make it much more likely you’ll have positive financial outcomes in your life. Financial literacy means you’ll be able to understand both basic financial concepts (related to banking and saving) as well as more complex concepts (like credit and interest) that control your money and money outcomes. If you understand those concepts, you can make financial decisions more quickly, more easily, and with better results.
So what do I need to be literate about?
As we said above, learning financial literacy unfolds over a lifetime, and there are many concepts involved. But there are five basic categories:
- Banking: Being fluent in how checking and savings accounts work, a basic understanding of interest, and knowing how to write checks and use debit cards.
- Budgeting: Managing and reviewing monthly income and expenses, with an eye toward long-term goals. Building a budget framework so you don’t live above your means.
- Saving: Setting aside a portion of your income for both long-term and short-term goals, building and maintaining an emergency fund, understanding how interest rates affect your savings.
- Credit & Debt: Understanding how borrowing money works and what it costs, from credit cards to loans, learning about debt to income ratio and credit utilization (which impact credit score), being able to evaluation repayment terms, debt solutions and forbearance.
- Investing: Understanding different investment vehicles, from savings accounts to stock funds, brokerage accounts, robo-investing and more. Contributing to retirement savings. Understanding tax implications and benefits of different investments.
Becoming financially literate about all of the above doesn’t just happen as you live life. Smart money consumers will actively seek out information, ask questions (of bank employees, financial advisors, friends and family), and not worry about looking uninformed. To avoid learning skills that will ease your progress in life because you don’t want to seek assistance is short-sighted; almost everyone needs help in mastering the above concepts.
What if I can’t “afford” financial literacy?
If you think financial literacy is not for you, because you’re struggling with debt or student loans or making ends meet, you’re wrong. Taking time now to learn these concepts will help accelerate your forward movement toward financial stability. Consider spending some time on personal finance websites geared toward education, such as NerdWallet and PennyHoarder.
But if you are suffering a financial hardship right now, or struggling to meet monthly minimums on escalating credit card debt, what you need now is a clear plan to get out of debt.