Financial Literacy

• Financial literacy is the ability to understand and make use of a variety of financial skills.
• Financial literacy in the United States is declining at a time when citizens increasingly need to make thoughtful and informed decisions to avoid high levels of debt and have adequate income in retirement.
• Some of the basics of financial literacy and its practical application in everyday life include banking, budgeting, handling debt and credit, and investing.

One of the most important life skills needed to thrive is the ability to manage stress. Coping with stress is a critical skill, but the best way to manage stress is to reduce what is causing it. At the top of the list of stressors is finances. The solutions being offered today tend to focus on budgeting, debt reduction, and retirement planning. All very important, but unless the individual’s relationship with money changes, nothing will change.

Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. The meaning of financial literacy is the foundation of your relationship with money, and it is a lifelong journey of learning. The earlier you start, the better off you will be because education is the key to success when it comes to money.

The term financial literacy refers to a variety of important financial skills and concepts. People who are financially literate are generally less vulnerable to financial fraud. A strong foundation of financial literacy can help support various life goals, such as saving for education or retirement, using debt responsibly, and running a business. Key aspects to financial literacy include knowing how to create a budget, plan for retirement, manage debt, and track personal spending.

From day-to-day expenses to long-term budget forecasting, financial literacy is crucial for managing these factors. As mentioned above, it is important to plan and save enough to provide adequate income in retirement while avoiding high levels of debt that might result in bankruptcy, defaults, and foreclosures.

Yet, in its Economic Well-Being of U.S. Households in 2020 report, the U.S. Federal Reserve System Board of Governors found that many Americans are unprepared for retirement. Over one-fourth indicated they have no retirement savings, and fewer than four in 10 of those not yet retired felt that their retirement savings are on track. Among those who have self-directed retirement savings, more than 60% admitted to feeling low levels of confidence in making
retirement decisions.

Low financial literacy has left Millennials—the largest share of the American workforce—unprepared for a severe financial crisis, according to research by the TIAA Institute. Even among those who report having a high knowledge of personal finance, only 19% answered questions about fundamental financial concepts correctly. Forty-three percent report using expensive alternative financial services, such as payday loans and pawnshops. More than half lack an emergency fund to cover three months’ expenses, and 37% are financially fragile (defined as unable or unlikely to be able to come up with $2,000 within a month in the event of an emergency). Millennials also carry large amounts of student loan and mortgage debt—in fact, 44% of them say they have too much debt.

Though these may seem like individual problems, they have a wider effect on the entire population than previously believed. All one needs is to look at the financial crisis of 2008 to see the financial impact on the entire economy that arose from a lack of understanding of mortgage products (creating a vulnerability to predatory lending). Financial literacy is an issue with broad implications for economic health.

In a 2021 survey by the Federal Reserve, 22% of adults in the United States reported not being okay financially and not living comfortably financially. (Board of Governors of the Federal Reserve System. “Economic Well-Being of U.S. Households in 2021.”)

Becoming financially literate involves learning and practicing a variety of skills related to budgeting, managing and paying off debts, and understanding credit and investment products. Basic steps to improve your personal finances include creating a budget, keeping track of expenses, being diligent about timely payments, being prudent about saving money, periodically checking your credit report, and investing for your future.

There are five broad principles of financial literacy. Though other models may list different key components, the overarching goal of financial literacy is to educate individuals on how to earn, spend, save, borrow, and protect their money.

Financial literacy the knowledge of how to make smart decisions with money. This includes preparing a budget, knowing how much to save, deciding favorable loan terms, understanding impacts to credit, and distinguishing different vehicles used for retirement. These skills help individuals make smarter decisions and act more responsibly with their personal finances.