What is financial literacy and why does it matter

Quick insights

• Financial literacy refers to an understanding of the concepts and best practices related to money management.
• Main aspects of financial literacy are earning, protecting, spending and saving.
• Financial literacy can lead you to be more organized and responsible with your money, helping you reach your financial goals.

Literacy generally refers to the ability to read and write, but what is financial literacy? It’s knowledge of various financial topics and practices that informs how you personally manage money. Increasing that knowledge and putting it into practice can be a lifelong process that consistently helps you meet your financial needs and goals.

Understanding financial literacy: Four main concepts

To explain the term financial literacy, let’s break down the major financial concepts into earning, protecting, spending and saving money.

Earning

Knowing how to earn money is a vital part of financial literacy. For most people, earning money means having a traditional job with set hours and pay. Other types of work can provide income, such as freelance, contract and part-time jobs. Regardless of the opportunities, earning money is the first aspect of financial literacy.

There’s another important aspect to earning money—paying taxes—and knowing how they work is part of financial literacy. The money you earn is subject to federal, state and local taxation. The taxes you pay vary based on what you earn, as well as where you work and live.

Protecting

Another component of financial literacy is knowing how to store and protect your money. What are you protecting your money from? In general, loss, theft and overspending. Bank accounts are important tools for storing money and helping you budget. For most, checking and savings accounts are appropriate options for storing and protecting your money.

Spending

Spending money might sound easy, but this aspect of financial literacy refers to having a way to pay for goods and services. Checking accounts are meant for some of the most common financial transactions, including purchases and bills.

A debit card and paper checks are commonly issued when you open a checking account. The card will have your name and information that is used to process your spending. Paper checks can be used for expenses and gifts. Regardless of which payment method you use, the money is paid directly from the linked checking account.

Saving

Earning income comes with the opportunity to save your hard-earned money. Calculating a budget will help you determine how much you can save. Understanding how much you can save is important for building long-term financial security and reaching personal goals that cost money.

The money you save could be for any number of things. For example:

• House or apartment
• Vehicle
• Upcoming birthday or holiday
• College
• Retirement
• Vacations
• Emergencies

Savings accounts are meant for storing money, whatever your goals.

Why is financial literacy important?

Understanding how to manage personal finances is important for several reasons, and here are some examples of what financial literacy can offer you:

• Organization: When you organize your finances, the decisions that keep you on track to achieving goals may be easier to make. Budgets are very useful tools, and knowing how you’ll store, spend and save your money can be empowering.
• Responsibility: A deep understanding of your budget leads to smart spending and saving. This sort of accountability for your finances is rewarding. Your future self will thank you for making responsible decisions with the money you earn.
• Security: Financial literacy can create security and stability for you in the future. Most of life’s essentials cost money—food, shelter and clothing, to name a few. If you learn how to budget, save and maybe even invest, you can set yourself up for life’s unpredictable financial obstacles.

How to improve your financial literacy

The more you learn about money and how to manage it, the more financially literate you can become. Expanding your knowledge takes time, and you might put it into practice in a variety of ways.

By reading this article, you’ve already taken an important first step. To help continue your journey toward financial literacy, consider these opportunities:

• Employer resources: Your employer may offer financial services and education to help you become more financially literate. Resources could range from budget templates and financial counseling to sponsored accounts, including a 401(k).
• Online resources: Many online resources, including our Education Center, have valuable information for improving your financial literacy.
• Financial advisors: Seeking help from a financial advisor can help you become more financially literate. These pros have expertise and can speak to your individual questions and needs.

In summary

Financial literacy refers to the knowledge and practices that help people to manage money. Earning, spending, protecting and saving money are common parts of life. Learning how to do each has many advantages, and you can use newfound knowledge in a variety of ways. You could save for retirement or simply make informed financial decisions that will benefit your future self.