What does it mean to be Financially Literate
People with a high level of financial literacy are able to make informed decisions by putting their financial education to work.
Understanding how money works is practical by nature and can be a make-it or break-it knowledge base and skill set for one’s life. Financially literate people are able to organize their money to meet their future goals—regardless of what those goals may be—by simply being smart with money. This is usually best accomplished with the assistance of a financial professional.
Financial literacy is becoming increasingly essential in today’s evolving world. A lack of financial literacy could lead to a wide number of financial difficulties for people, contributing to important social issues in our nation including poverty, job scarcity, and wealth inequality.¹ It can also create stress that can have a negative impact on mental and emotional health.² Financial skills can help provide benefits that go beyond mere financial awareness. They can also lead to an improvement of personal well-being because those who are financially literate usually have greater success and peace throughout their lives.
To understand what financial literacy means it’s important to know and follow the correct steps. Having financial literacy adds to the values, skills, and self-confidence necessary to make insightful, strategic money decisions. Yes, becoming financially literate takes a little work, but the outcome can greatly improve quality of life.
Financial literacy helps people understand relevant money concepts. Knowing about the Time Value of Money is a great example. This concept informs us that the money available now is worth more than the same amount in the future because of its ability to earn interest. Concepts like this create urgency, inspiring people to increase their financial education, and then use that knowledge to take action and create healthy money habits.
Financially literate people: - Ask the right questions of their financial professional
- Are aware of the reasons behind their decisions
- Set aside part of their income on a regular basis
- Make plans for the future
- Protect their family in the event of sickness or premature death
- Set financial goals and make plans to achieve those goals
- Set aside savings for emergencies
- Keep their financial obligations under control
- Monitor their spending patterns
- Understand concepts such as loans, credit, and debt
- Are aware of the services banks provide
- Are knowledgeable about investment options
- Do not spend more than they earn
- Have an understanding of tax-related issues
If you develop the skills outlined within, you can consider yourself well on your way to becoming financially literate.
— Tom Mathews
¹ “COVID showed why we need to make financial literacy a national priority,” Carrie Schwab-Pomerantz, Fortune, Sept 24, 2020, https://fortune.com/2020/09/24/personal-financial-literacy-health-schwab/
² “The Link Between Physical and Financial Health,” Marcus by Goldman Sachs, Feb 27, 2020, https://www.marcus.com/content/marcus/us/en/resources/personal-finance/physical-and-financial-health