Why Is Financial Literacy so Important? Everything You Need to Know
Financial literacy can make the difference between smart, confident financial choices and struggling to make ends meet. By becoming financially literate, you’re more likely to avoid blowing your paycheck on $68 Diptyque candles (we plead the Fifth) in lieu of something slightly more productive, such as paying off your credit card bills and becoming debt-free.
Financial literacy can allow you to stop working that job you hate, travel, be more philanthropic, and enjoy life more. Sounds pretty sweet, right?
What is financial literacy?
Financial literacy is the ability to make smart financial choices that can help you reach your financial goals. It’s having a solid understanding of debt, credit, and financial topics that can inform how you spend your money. Financial literacy can include everything from knowing how to best use a credit card to how to invest in the stock market.
Why it’s important to be financially literate
Financial literacy and the ability to manage money well can have a huge impact on your life. It can help you save for your children’s college education, avoid debt, and retire early, among other things.
Managing money effectively is critical to our lives, yet most Americans aren’t financially literate. In fact, 63% of Americans aren’t able to pass a basic financial literacy test. And only one in six high school students are required to take a semester of personal finance for graduation.
6 financial literacy basics
If you weren’t one of those kids who had to take a personal finance class in high school, some basics of financial literacy include:
Big-ticket items like homes and cars require savings to make a down payment and avoid sinking into debt. Learning how to save money can help you buy these items without breaking the bank (or robbing one).
On the flip side, you can’t just save all your money under a mattress and expect to keep up with inflation. Effective investing can help you make money with your money thanks to compound interest.
Learning how to create and stick to a budget can help you avoid unnecessary spending and help you best utilize your hard-earned cash.
4. Using credit cards:
Understanding how to best use credit cards is an important part of building a healthy credit score. Your credit score can be the difference between getting accepted or rejected for a loan—and getting a favorable interest rate.
5. Protecting your identity:
Safeguard your finances by knowing how phishing scams work and how you can avoid them through secure passwords and tools.
6. Saving for retirement:
While retirement might seem lightyears away, it’s still important to get a head start. Understanding how 401(k)s and IRAs/Roth IRAs work today can give you a financially secure tomorrow.
Examples of financial literacy
Some examples of financial literacy at work include:
- Paying your credit card balances in full to avoid paying interest
- Regularly checking your credit report for mistakes
- Creating a budget by comparing your post-tax income against your monthly expenses
- Putting extra money from a raise into an emergency or retirement fund
Financial literacy affects every aspect of our lives. So, what are you waiting for? Read financial articles, listen to podcasts, talk to experts, and get your financial life on track. Your candle collection might suffer, but your livelihood will thank you.