The Basics Of Financial Literacy

A financial safety net can help people navigate the ups and downs of life. Developing that safety net requires a measure of financial literacy that anyone can nurture.

What is financial literacy?

The United States Department of Education defines financial literacy as an understanding of how to earn, manage and invest money. That recognition can increase the chances that individuals make sound financial decisions, thus setting them up for long-term success and stability.

What makes financial literacy so important?

The benefits of financial literacy are not limited to theoretical notions such as the ability to understand money makes individuals more likely to make sound decisions regarding their finances. Indeed, the Financial Industry Regulatory Authority (FINRA) notes that financial literacy has been proven to produce positive results. In its National Financial Capability Study released in 2022, the FINRA found that respondents who exhibited higher financial literacy were more likely to make ends meet than those without such knowledge. Sixty-five percent of respondents with higher financial literacy were able to set aside three months' of emergency funds at higher levels than respondents with lower literacy levels. The study also linked financial literacy to long-term stability, as more than half of respondents (52 percent) with higher financial literacy calculated their retirement savings needs, an important step that fewer than one in three (29 percent) with lower literacy levels had taken.

What are some additional benefits of financial literacy?

Individuals are often confronted with a host of options when making financial decisions. That includes choices regarding bank accounts and credit cards, which are two variables related to financial literacy that individuals encounter every day. Individuals with financial literacy can pick a bank account that most suits their needs, whether that's standard accounts like checking and savings or something more unique like a high-yield savings account. Knowledge of financial basics also can prepare individuals to choose the right credit card, which can be a more difficult decision than choosing a bank account given the number of different cards available. Low-APR, no-APR, travel rewards, cash-back cards, and balance transfer cards are some of the options consumers can choose from when picking a credit card. Financial literacy increases the chances consumers pick the card that best suits their short- and long-term needs.

Financial literacy can help people navigate challenges that periodically arise during the course of everyone's life. Taking time to learn some financial basics can set people up for long-term economic health.