Table of Contents
Financial literacy is a way of saying that you have a good working knowledge of the basics of managing money and using it to reach your goals. It typically means you understand budgeting; you know how different financial products can help you protect and grow your cash; and you are aware of how the financial climate (from inflation to interest rates) can impact your personal situation.
Building financial literacy is a valuable move because it helps you achieve goals like saving for the down payment on a house, affording your kid’s college costs, and being prepared for retirement.
Read on to take a financial literacy quiz, learn more about financial literacy, and find out how to build it.
Key Points
• Financial literacy involves understanding fundamental money concepts to achieve personal financial goals.
• Being financially literate helps in avoiding debt, planning finances, and earning higher interest rates.
• Budgeting, interest, saving, credit, and investing are essential components of financial literacy.
• Government resources provide educational tools for financial literacy.
• Enhancing financial literacy can reduce stress, build wealth, and increase confidence in managing money.
Why Financial Literacy Is Important
Higher levels of financial literacy have been consistently linked to responsible money management. This can help consumers:
• Avoid high-cost debt
• Plan for financial goals
• Avoid defaulting on mortgages
• Build an emergency savings fund
• Earn higher interest on investments
Boosting your financial literacy can be a great way to be confident that you have the information and insight you need to manage your finances well, today and tomorrow.
Are You Financially Literate?
If you feel as if you are not fully financially literate, it might be a case of not having focused on this aspect of your life. After all, financial literacy isn’t usually a part of the curriculum in high school or college.
Also, age plays a factor in financial literacy. The younger you are, the less money know-how you are likely to have. One recent study found that Gen Z (born between 1997 and 2012) had less financial savvy than Millennials, Gen X, and Boomers. Which could be understandable: The younger a person is, the less likely it can be that they’ve gone mortgage shopping, waded deeply into retirement planning, or researched health insurance.
Typically, financial literacy based on such key components of this type of knowledge as:
• Knowing how to create a budget so that you’re aware of and accountable for where your money is going
• Understanding how interest works when you save and invest, as well as how it works when you borrow, including the concept of compound interest
• Saving, whether that means for emergencies (perhaps stashed in a high-yield savings account) or for a specific goal, such as a big-ticket item or even a house
• Knowing the facts about credit card debt, managing your debt well, and avoiding the credit card debt roller-coaster
• Protecting your identity and otherwise using practices to safeguard your funds
• Investing wisely, and understanding how the average stock market return
Financial Literacy Quiz
Educating Yourself
If you’ve taken our quiz, the financial literacy questions will likely have helped you to pinpoint if you need to bolster your understanding of money matters.
Financial topics can be challenging, but fortunately, there are plenty of resources to help you increase your knowledge. Your bank may have a library of information as well as tools and calculators to help you do some number crunching and give you a better picture of your finances.
Your local library and book retailers, as well as financial magazines and websites, probably have plenty of information too. It can be a smart move to veer towards those publications that are well-regarded vs. following, say, an influencer without credentials but a lot of lofty promises on social media.
Podcasts, newsletters, and continuing-ed classes are other options. It can also make good sense to find a financial planner, who can walk you through your own unique challenges and opportunities.
Government Resources for Building Financial Literacy
There are also government resources, including those available at the Financial Literacy and Education Commission (FLEC), connected to the Treasury Department. This commission was founded to boost literacy.
Another government site, one created by FLEC, is dedicated to financial education: MyMoney.gov . This site provides practical information about each of what they call the five building blocks for money management (MyMoney Five), which are:
• Earn: Understand your pay and benefits to make the most out of what you earn.
• Save and Invest: Start as soon as you can to save for future goals, even if you need to begin by saving small amounts.
• Protect: Create an emergency savings fund, choose the right insurance for your needs, and otherwise take precautions to protect your finances.
• Spend: Shop around and compare prices and products to get a good value on purchases, especially with larger ones.
• Borrow: Borrowing allows you to make essential purchases and also helps you to build credit, so it makes sense to understand how to borrow in the smartest way possible for your situation.
You can also access the government resource known as Federal Reserve Education , which provides resources for educators and students alike, while also empowering consumers to boost their understanding of banking. Topics include central banking and monetary policy, economics/macroeconomics, our government’s role in money regulation, personal finances, and more.
Here’s one more financial literacy resource from the federal government: FDIC’s Money Smart . This program provides resources to help people learn how to improve their financial management skills, from computer-based educational games to podcasts that focus on saving and borrowing.
The Takeaway
Building financial literacy can be done in a number of ways. Accessing government educational websites and diving into books, magazines, and podcasts from trusted sources can help build your money know-how. Also, look for a banking partner that provides educational resources.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What is financial literacy?
Financial literacy means having the knowledge and the skills to manage your personal finances effectively.
Why is financial literacy important?
Financial literacy can play an important role in your money management. It can reduce financial stress and help you build wealth, avoid debt, navigate emergencies, and encourage greater confidence in money matters.
How can I improve financial literacy?
There are several ways to improve financial literacy. You might review government websites on the topic, listen to podcasts or read books from well–regarded experts, and see what resources your bank provides. Budgeting well, avoiding debt, and understanding investing can be important components of your financial savvy.
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