What is Financial Literacy and Why is it Important?

If you’re wondering what financial literacy is, it’s simply having the skills and knowledge to manage your money well. It includes budgeting, saving, borrowing, investing and maintaining healthy debt. While there’s more to life than money, managing your finances well can be a key to a happier, more fulfilling life. It’s never too late to improve your financial literacy!

Financial literacy is the ability to understand and use financial skills including responsible money management, budgeting, saving and investing for the future. In 2004, the U.S. Congress designated April as National Financial Literacy Month. Their goal? Throughout this monthlong focus on the importance of financial literacy education, Americans could become more financially literate and make better money moves.

Financial literacy is crucial for making smart money choices. Unfortunately, the average American can use some improvement in this area. According to recent data, three in five adults in the U.S. don’t have a budget1and 48% of Americans have a credit card balance of $2,500 or more.2

Let’s take a deeper look at financial literacy, how it affects the money choices you make and ways to become more financially literate so you can manage your money responsibly all year long.

The First Steps to Financial Literacy

Learning to budget is a financial literacy skill that (ideally) should be acquired before you even receive your very first paycheck. A financially literate individual knows that using money mindfully and assigning an address for every dollar will help keep spending under control, meet all monthly payments and build savings. If you didn’t learn to budget early on, that’s OK — it’s never too late to increase your financial knowledge.

Another crucial component of financial literacy is building your savings. This includes saving for a rainy day, long-term goals and large purchases such as a vacation, vehicle or house. For the financially literate individual who has followed the pay yourself first principle, each one of these goals is attainable.

Another important facet of financial literacy is building credit. This includes opening starter credit cards after you turn 18 and being careful about keeping credit utilization low while also paying your bills in full before they’re due. The financially literate individual builds a strong credit file early in life and thus benefits from access to large loans with low interest rates that will save them money throughout the loan’s term.

Finally, financial literacy advocates for saving for retirement during your early working years. As with all investments, the more time an investment has to grow, the less funds need to be set aside monthly to reach your designated goal.

How to Build Financial Literacy

In today’s world of information at your fingertips, building financial literacy is easier than ever. You can broaden your financial knowledge and strengthen your money skills by reading financial literacy books, listening to podcasts, and reading blogs and watching videos in our News & Knowledge Center.

Financial Literacy Month is all about deepening your money knowledge and improving the way you handle your finances. With a little bit of research, you’ll be able to build financial literacy that will help you feel financially strong and capable throughout the year.

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1https://www.nfcc.org/resources/client-impact-and-research/2019-consumer-financial-literacy-survey/
2https://www.fool.com/the-ascent/research/credit-card-debt-statistics/#:~:text=Americans%20have%20more%20than%20half,than%20they%20had%20in%202015.&text=Data%20source%3A%20Federal%20Reserve%20Bank%20of%20New%20York.

The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.