Financial literacy is one of those shiny keywords that gets bandied about in just about every self-help book, blog post, seminar, and podcast available on today’s world wide web. The term has a sharp, almost academic sound to it, and it just sounds like something successful people ought to possess.
So…what does financial literacy actually mean?
Finding the answer to this seemingly simple question has proven difficult for many people, and no one wants to wade through a sea of jargon or feel-good motivational speeches to get to it.
This is precisely why we’re going to give you a short, sweet, and delightfully simple look at financial literacy right here and now. Let’s start with the basics.
Word Banking: Financial Literacy Starts With Literacy….Literally.
Gaining financial literacy starts with understanding the basic language that describes what money is and does, how it is used, and who falls under the various categories that comprise the financial world.
To put it simply, you have to build up a financial vocabulary before you can become financially literate.
This can be done fairly quickly. Do you ever read articles or emails from your bank/accountant and need clarification on some of the words being used in them? Instead of skipping over them or ignoring the message entirely, stop and look those words up. A two-minute google search can usually provide a working definition of any given term.
Repeat this process enough times, and you’ll gain a basic level of fluency in no time! It’s the same basic premise as learning a foreign language, but without the extra effort. And while this strategy may sound self-explanatory and overly simplified, the fact of the matter is that few people actually make any sustained effort to gain an understanding of financial terminology.
Be honest: when was the last time you looked at an unfamiliar term – probably while filling out tax forms or reading an article in a publication like Forbes – and actually took the time not only to look it up but to become familiar with its usage in different contexts? Developing this kind of vocabulary takes a certain level of awareness, and it requires effort.
Here are a few examples of words/terms that are frequently used in financial content but that many people can’t adequately define if asked to do so:
- FICO Score
- Compound Interest
There are plenty of great books, videos, and online glossaries that detail common (and less common) financial terms and provide working definitions for them. These resources are easy to utilize and can be extremely useful to have on hand.
We’ve compiled a short list of our favorite glossaries and dictionaries below – feel free to use and share it!
- Financial Terms Dictionary - Investment Terminology Explained by Wesley Crowder
- Investopedia’s Financial Terms Dictionary
- The Consumer Finance Financial Terms Glossary (Teaching Resource)
- The Department of Financial Protection & Innovation Glossary of Financial Terms
- NASDAQ’s Financial Terms By Letter resource
- The New York Times’ Glossary of Financial and Business Terms (Archives)
There are many more glossaries, dictionaries, and guides out there, and we’re always discovering more from our accountants and clients. Get familiar with the most commonly used words and terms, and you’ll be well on your way to broader financial literacy.
Getting Comfortable With “The Lingo” Of Finance: Learning To Be Confident Whether You Do Or Don’t Know Something
There’s a strange sense of embarrassment many of us experience when we feel “out of our depth” while discussing topics like finance – especially when the finances in question are our own. Naturally, we try to avoid that feeling.
Often we do this by changing the subject, pretending to know what the other person is talking about, or by quickly and frantically scouring our memory for some scrap of context that will help us to make sense of the topic at hand.
None of these responses are beneficial in the long term.
Even the most seasoned investors and hedge fund managers were once complete amateurs. We all start off at zero regarding our financial knowledge. Financial literacy is less about knowing specific things and more about becoming comfortable with the concepts and principles behind them.
When you feel out of your depth, don’t pretend to be otherwise. Ask questions, and pause the conversation to look up information or seek out knowledge – this is how you build up genuine financial literacy one brick at a time. It requires a certain level of vulnerability that can’t be achieved if you aren’t willing to admit when you don’t know something.
Financial Literacy Is A State Of Mind
Now that we’ve gone through the underpinnings of financial literacy, let’s dig deeper and get to the heart of this term. Language is the lens through which we view our world, and money is a language all its own.
Financial literacy is more than a language, though. It’s a way of thinking. Being financially literate means approaching problems a certain way, viewing money according to a specific set of rules and philosophies, and relating to finance via a defined relationship.
It’s about seeing money as more than money – because, in the end, money is a symbol for other, far more powerful forces in our lives.
Think of it this way: do you work hard because you want a stack of green paper in your hand, or do you work so that you can afford the things you want and need? Do you feel joy when you see positive numbers in your accounts simply because you like numbers, or is it because you know that those numbers represent security, possibilities, and a better future?
If money were just money, it wouldn’t hold much value or meaning in our lives. At its core, financial literacy is all about seeing money as a vehicle rather than an object. The goal of financial literacy isn’t simply to “have more money” but rather to use your money better. It’s a matter of learning the difference between chasing money and building financial security/prosperity.
Certain financial concepts are indelible. You can think of these as the commandments or core tenets of financial literacy. They include concepts like
- Investing is better than saving
- Every dollar has a job/purpose
- Assets are momentum, liabilities are hurdles
- Live below your means to achieve your dreams
Following these commandments is the cornerstone of sound financial management. Cultivating a state of mind based on them means that you are financially literate not only in concept but also in practice.
Concluding Thoughts: Financial Literacy Is More Than Knowledge – It’s A Matter Of Behavior
By now, we hope you’ve realized that financial literacy isn’t a term. It’s a pattern of behavior, a mindset toward money, and a personal philosophy. These facets add up to a full picture of financial health and wellness that can’t be captured in two paltry words.
Just as “health” is a term that refers to a whole plethora of choices, measurements, fields of knowledge, and end results, “financial literacy” encapsulates many different ideas and a number of essential principles.
This doesn’t mean that you should be intimidated by the term, however. All in all, becoming financially literate is a lot simpler than achieving perfect physical health. It requires some effort and dedication, to be sure, but the basic concepts of financial literacy are often intuitive. Building that literacy up and putting it into practice is a matter of time, not IQ, and even the smallest choices can have a big impact on how financially literate you become.
Take the time to ask questions. Get comfortable with what you don’t know. Take a few seconds to look a word or concept up if you aren’t sure about it, and read a couple of financial articles each week. Talk to your accountant or advisor – not only when you need a service but also when you simply have a question you’d like answered.
These small choices make an enormous difference, and you can only appreciate the results when you try them.
Foumberg, Juneja, Rocher & Company is a fully accredited CPA firm with offices in Encino and Los Angeles, California. We are committed to our mission of premium client experiences, public education & financial activism, and personalized service. Reach out to us at https://www.foumbergco.com/ to learn more!
Financial literacy is 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.Is financial literacy enough? ›
Bottom Line. While financial literacy courses offered in schools may not be perfect, most experts seem to agree they're better than nothing. And for some students, the lessons on budgeting or saving they learn in school may be the only financial education they ever receive.What is financial literacy for you? ›
Financial literacy helps you manage your money wisely, make sound financial decisions, and achieve financial stability in life. On top of this, financial literacy also helps you get through the unexpected moments in life – like a medical emergency or a sudden loss of employment.What is financial literacy quizlet? ›
What is financial literacy? the ability to use knowledge and skills to make effective and informed money management decisions.What does financial literacy simply mean? ›
What Is Financial Literacy? Financial literacy refers to the ability to understand and apply different financial skills effectively, including personal financial management, budgeting, and saving.Why is financial literacy so important? ›
Financial literacy can help individuals reach their goals: By better understanding how to budget and save money, individuals can create plans that set expectations, hold them accountable to their finances, and set a course for achieving seemingly unachievable goals.What are the 3 main components of financial literacy? ›
- An Up-to-Date Budget. Some tend to look at the word “budget” as tantamount to the word “diet,” but at its most basic, a budget is just a spending plan. ...
- Dedicated Savings (and Saving to Spend) ...
- ID Theft Prevention.
- Subscribe to financial newsletters. For free financial news in your inbox, try subscribing to financial newsletters from trusted sources. ...
- Listen to financial podcasts. ...
- Read personal finance books. ...
- Use social media. ...
- Keep a budget. ...
- Talk to a financial professional.
Increased financial literacy leads to greater resilience during predictable and unpredictable life events. Learning how to earn, spend, save and invest wisely contributes to overall well-being and stability.How do you test for financial literacy? ›
- How much money should you put into savings every month? ...
- What are the 5 factors that add up to make your credit score? ...
- What's the most income you should use on monthly credit card payments? ...
- What's the maximum debt-to-income ratio you should have to maintain financial stability?
Financial literacy, or financial wellness, is understanding how to manage personal finances and money. Knowing how it works and how to budget, invest, borrow can help students make better financial decisions.What is financial literacy and why is it a problem in America? ›
A lack of understanding of financial services and the basics of personal finance lead to a perpetual cycle of poor financial decisions that restrict the social mobility of Americans. Worse yet, financial illiteracy in one individual can lead to chronic poverty, where generations of a family are born in poverty.What are good financial literacy questions? ›
- Managing Money. Am I doing okay with my money? ...
- Banking And Saving. Is my bank insured? ...
- Credit. What is credit? ...
- Housing. I am trying to figure out if I should rent or buy. ...
- Education. What is the best way to save for college? ...
- Insurance. ...
- Investing. ...
Literacy is the ability to read, write, speak and listen in a way that lets us communicate effectively and make sense of the world.Why is financial literacy so difficult? ›
It's considered a knowledge problem. Proper education is important, but financial literacy programs focus on the facts and figures and ignore our feelings (our emotions), which ultimately drive our behaviors. It's a mindset problem and not only a money and math problem.What is an example of financial literacy? ›
For example, a financially literate person knows that if they take home $2,000 a month in pay, they cannot spend more than $2,000 each month without going into debt. Someone with a higher level of financial literacy may know that they should save some of that $2,000 for the future.What are 3 benefits of financial literacy? ›
Benefits of Financial Literacy
Ability to make better financial decisions. Effective management of money and debt. Greater equipped to reach financial goals. Reduction of expenses through better regulation.
- It empowers them. ...
- Financial illiteracy breeds ill-equipped adults. ...
- Lack of financial education makes it easy for youth to pick up bad financial habits. ...
- Financial literacy helps to better prepare the youth for emergencies.
- No. 1: 53% of adults are financially anxious. ...
- No. 2: Two in three families lack an emergency fund. ...
- No. 3: 78% of adults live paycheck to paycheck. ...
- No. 4: Three in five adults don't keep a budget. ...
- No. 5: Four in five youths failed a financial literacy quiz. ...
- No. ...
- No. ...
It's a good time to brush up on the principles of financial planning—budgeting, managing debt, saving and investing.
According to the Financial Literacy and Education Commission, there are five key components of financial literacy: earn, spend, save and invest, borrow, and protect.What are the skills of financial literacy? ›
Financial literacy is the knowledge of an individual of financial matters like budgeting, investing, banking, and personal financial management, etc. This is the knowledge that helps someone to take appropriate action regarding their financial affairs.Who needs financial literacy skills? ›
The need for financial literacy is evidenced by the poor financial situation of individuals: drowning in debt without a budget plan and making misguided decisions about their money. Most of these poor financial behaviors stem from financial illiteracy (basic lack of understanding of financial competencies).How does financial literacy help poverty? ›
If residents have high financial literacy, they can better understand bank lending policies, insurance services and other related financial services, reducing the cost of financial services (Van Rooij et al., 2011).Which is the first step toward financial literacy? ›
Step 1) Budgeting
Budgeting is perhaps the most important first step one can take in their financial journey. Understanding exactly how much money is coming in versus how much you are spending each month can help you plan, allocate, and reorganize your finances for the future.
Synonyms. Financial education; Financial knowledge; Financial learning; Financial proficiency; Financial skills.Can financial literacy be taught? ›
Financial literacy classes teach students the basics of money management: budgeting, saving, debt, investing, giving and more. That knowledge lays a foundation for students to build strong money habits early on and avoid many of the mistakes that lead to lifelong money struggles.Is financial literacy a hard skill? ›
Some examples of hard skills could include computer skills, software development, financial literacy, bilingual or multilingual capabilities, or campaign management. You can also see hard skills demonstrated by licenses or accreditations that a worker has earned.How much money should you put into savings every month? ›
A good rule of thumb is to aim for saving at least 10-15% of your income each month. This will help you build a solid financial foundation and give you the ability to reach long-term goals such as retirement or purchasing a home. If you are able to save more than 15%, that's even better.What are financial skills? ›
Finance skills are soft and hard skills that enable stakeholders to manage and navigate financial decision-making and problem-solving. Some common roles that require financial skills on a resume are: Accountants. Financial analysts. Chief financial officers (CFOs)
- At the beginning of the month, make a plan for how you will spend your money that month. Write what you think you will earn and spend.
- Write down what you spend. ...
- At the end of the month, see if you spent what you planned.
- Use the information to help you plan the next month's budget.
Fast answer: A general rule of thumb is to have one times your annual income saved by age 30, three times by 40, and so on.How many people lack financial literacy? ›
Lack of financial literacy cost 15% of adults at least $10,000 in 2022. Here's how the rest fared. The share of people who said not being financially literate cost them more than $10,000 is up from 11% in 2021, according to a new report. Most respondents say it cost them under $500, if at all.How do I make sure I save money? ›
- Eliminate Your Debt. ...
- Set Savings Goals. ...
- Pay Yourself First. ...
- Stop Smoking. ...
- Take a "Staycation" ...
- Spend to Save. ...
- Utility Savings. ...
- Pack Your Lunch.
- Interest Rate Question. Suppose you had $100 in a savings account and the interest rate was 2% per year. ...
- Inflation Question. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. ...
- Risk Diversification Question.
The importance of saving money is simple: It allows you to enjoy greater security in your life. If you have cash set aside for emergencies, you have a fallback should something unexpected happen. And, if you have savings set aside for discretionary expenses, you may be able to take risks or try new things.What are the 4 types of literacy? ›
- Reading and Writing. Traditional definitions of literacy usually refer to the ability to read and write. ...
- Digital Literacy. ...
- Financial Literacy. ...
- Cultural Literacy.
Literacy skills can be divided into three main areas: information literacy, digital literacy and media literacy.What are the 5 definitions of literacy? ›
Literacy is the ability to identify, understand, interpret, create, communicate and compute, using printed and written materials associated with varying contexts.What is the most basics of financial literacy? ›
Financial literacy involves concepts like budgeting, saving, building credit, borrowing and repaying debt, and investing. Becoming more financially literate might make major financial decisions—like loans, major purchases and investments—less daunting.
In conclusion, financial literacy has both its advantages and disadvantages. On the one hand, being financially literate can help individuals make more informed decisions with their money and avoid debt. On the other hand, financial literacy can also lead to people becoming more materialistic and obsessed with money.What are the disadvantages of financial literacy? ›
Another concern some may have is that financial literacy is that some who believe themselves to be financially literate could overestimate their ability to manage money. This overconfidence could lead them to make poor decisions, such as taking on too much debt or investing in high-risk ventures.Are 53% of adults financially anxious? ›
Over 53% of adults say thinking about their financial situation makes them anxious. Forty-four percent say discussing their finances is stressful.Why isn t financial literacy taught? ›
Another reason for the lack of financial education in schools is that educational decisions are made on a state level. That means there are no federal mandates or guidelines to help schools master the most effective approach to teaching personal finance.Why is financial literacy declining? ›
In fact, much of the downward trend in financial literacy can be traced back to respondents increasingly selecting “don't know” as their response option to the underlying questions. The rise in “don't know” responses accounts for 75 percent of the drop in financial knowledge from 2009 to 2021.How big of a problem is financial literacy? ›
Lack of financial literacy cost 15% of adults at least $10,000 in 2022. Here's how the rest fared. The share of people who said not being financially literate cost them more than $10,000 is up from 11% in 2021, according to a new report.At what age do people feel financially stable? ›
By the time you're 40, a majority of your financial struggles should be over. You may still be saving and planning for retirement, but you aren't entirely done yet.How much money does it take to be financially comfortable? ›
A majority of respondents saying they need $100,000 or more to feel financially comfortable makes sense considering the average personal debt balance — including mortgages and student loans — was $101,915 in 2022, per credit bureau Experian's most recent data.Why am I always struggling financially? ›
According to financial therapists, most money problems are rooted in self-esteem, trauma recovery, or scarcity mindset issues. Getting to the emotional root of your money problems is key to getting the clarity you need to change.Why is financial literacy a problem in America? ›
A lack of understanding of financial services and the basics of personal finance lead to a perpetual cycle of poor financial decisions that restrict the social mobility of Americans. Worse yet, financial illiteracy in one individual can lead to chronic poverty, where generations of a family are born in poverty.
A simple financial illiteracy definition is the opposite of financial literacy (see financial ability definition) —a deficiency of the financial competencies that would allow individuals to make economic choices aligned with their long-term financial goals.Where does US rank in financial literacy? ›
In a study of adults in 143 nations, the U.S ranks 14th, according to the Standard & Poor's Global Financial Literacy Survey, conducted with the Global Financial Literacy Excellence Center at George Washington University and World Bank Development Research Group.How many black people are financially literate? ›
While 66% of African Americans report that they are doing at least OK financially, the comparable figure among whites is 78%. Median household income among African Americans was $35,400 in 2016; median household income of whites was $61,200.