Financial literacy is the cognitive understanding of financial components and skills such as budgeting, investing, borrowing, taxation, and personal financial management. The absence of such skills is referred to as being financially illiterate.

Financial literacy: 
Financial literacy is the possession of skills, knowledge, and behaviors that allow an individual to make informed decisions regarding money. Financial literacy, financial education and financial knowledge are used interchangeably

Financial literacy can help protect individuals from becoming victims of financial fraud, a type of crime that is becoming more commonplace.

Scope of Financial Literacy
Although many skills might fall under the umbrella of financial literacy, popular examples include household budgeting, learning how to manage and pay off debts, and evaluating the tradeoffs between different credit and investment products. These skills often require at least a working knowledge of key financial concepts, such as compound interest and the time value of money.

Financial literacy can cover short- and long-term financial strategies. The strategy you use will depend on several factors, such as your age, investment time horizon, and risk tolerance. Financial literacy also encompasses knowing how investment decisions made today will impact your tax liabilities in the future.

Financial products such as mortgages, student loans, health insurance, and self-directed investment accounts have grown in importance. It is imperative for individuals to understand how to use them responsibly. It’s also important to know which investment vehicles are best to use when saving, whether for a financial goal like buying a home or for retirement.

Financial literacy can help protect individuals from becoming victims of financial fraud, a type of crime that is becoming more commonplace.

Scope of Financial Literacy
Although many skills might fall under the umbrella of financial literacy, popular examples include household budgeting, learning how to manage and pay off debts, and evaluating the tradeoffs between different credit and investment products. These skills often require at least a working knowledge of key financial concepts, such as compound interest and the time value of money.

Financial literacy can cover short- and long-term financial strategies. The strategy you use will depend on several factors, such as your age, investment time horizon, and risk tolerance. Financial literacy also encompasses knowing how investment decisions made today will impact your tax liabilities in the future.

Financial products such as mortgages, student loans, health insurance, and self-directed investment accounts have grown in importance. It is imperative for individuals to understand how to use them responsibly. It’s also important to know which investment vehicles are best to use when saving, whether for a financial goal like buying a home or for retirement.

Millennials’ Challenge
Lack of financial literacy has left millennials—the largest share of the American workforce—unprepared for a severe financial crisis, according to research by the TIAA Institute. Even among those who reported having a high knowledge of personal finance, only 19% answered questions about fundamental financial concepts correctly.

Forty-three percent reported using expensive alternative financial services, such as payday loans and pawnshops. More than half lacked an emergency fund to cover three months’ of expenses, and 37% were financially fragile (defined as unable or unlikely to be able to come up with $2,000 within a month in the event of an emergency)

Millennials also carry large amounts of student loan and mortgage debt. In fact, 44% of them said they have too much debt.

Though these may seem like individual problems, they have a wider effect on the entire population than previously believed. The lack of knowledge of mortgage products prior to the 2008 financial crisis created widespread vulnerability to predatory lending. The financial impact of that crisis affected the entire economy.

Financial literacy is an issue with broad implications for economic health.

If you are a younger individual, retirement may seem years away. Yet it is one of the best goals to begin saving for. That’s because the earlier you start, the longer your invested savings will have to compound and the more money you’ll end up with. An employer-sponsored retirement account, such as a 401(k), can help.

Benefits of Financial Literacy:
Broadly speaking, the benefit of financial literacy is that it empowers individuals to make smarter decisions about their finances. In addition:Financial literacy can prevent devastating financial mistakes: Floating rate loans may have different interest rates each month, while traditional individual retirement account (IRA) contributions can’t be withdrawn until retirement. For someone unaware of these and other financial facts, seemingly innocent financial decisions may have long-term implications that cost them money or impact life plans. Financial literacy helps individuals avoid making mistakes with their personal finances.

Financial literacy prepares people for financial emergencies: Topics such as saving or emergency preparedness get individuals ready for uncertain times. Though losing a job or having a major unexpected expense can be financially impactful, an individual can cushion the blow by saving regularly.

Financial literacy can help individuals reach their goals: By better understanding how to budget and save money, individuals can create plans that define expectations, hold them accountable to their finances, and set a course for achieving important financial goals. Though someone may not be able to afford a dream today, they can create a plan that can help make it happen.

Financial literacy gives rise to confidence: Imagine having to make a life-changing financial decision without all the necessary information. With knowledge about finances, individuals can approach major life choices with greater confidence. They’ll be more likely to achieve the outcome they desire and less likely to be surprised or negatively impacted by unforeseen outcom.

Strategies to Improve Financial Literacy Skills:
Developing financial literacy involves learning and practicing skills related to budgeting, managing, and paying off debts, and more. It means understanding and using credit and investment products wisely. The good news is that, no matter where you are in life and financially, it’s never too late to start practicing good financial habits.

Here are several practical strategies to consider.

Create a Budget:
Track how much money you receive each month and how much you spend. You can use an Excel spreadsheet, paper, or a budgeting app. Your budget should include income (paychecks, investments, alimony), fixed expenses (rent/mortgage payments, utilities, loan payments), discretionary spending (nonessentials such as eating out, shopping, and travel), and savings. Pairing your budget with an expense tracking app can help identify where you are spending each month and where you might be able to save.

Pay Yourself First:
To build savings, this reverse budgeting strategy involves choosing a savings goal, such as paying for higher education, deciding how much you want to contribute toward it each month, and setting that amount aside before you divvy up the rest of your expenses.

Pay Bills Promptly:
Stay on top of monthly bills, making sure that your payments are always sent to arrive on time. Consider taking advantage of automatic debits from a checking account or bill-pay apps, and sign up for payment reminders (by email, phone, or text).

Get Your Credit Report:
Once a year, consumers can request a free credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—through the federally created website AnnualCreditReport.com.

Review these reports and dispute any errors by informing the credit bureau of inaccuracies. Because you can get three of them, consider spacing out your requests throughout the year to monitor your credit regularly.

In a 2022 survey by the Federal Reserve, 27% of adults in the U.S. reported not “doing okay” financially. The number who reported not living comfortably increased from 2021.

Check Your Credit Score:
A good credit score enables you to obtain the best interest rates on loans and credit cards, among other benefits. Monitor your score via a free credit monitoring service. Or, if you can afford to and want to add an extra layer of protection for your personal information, use a credit monitoring service. In addition, be aware of what can raise or lower your scores, such as credit inquiries and credit utilization ratios.

Manage Debt:
Use your budget to stay on top of debt by reducing spending and increasing repayment. Develop a debt reduction plan, such as paying down the loan with the highest interest rate first. If your debt is excessive, contact lenders to renegotiate repayment, consolidate loans, or find a debt counseling program.

Invest in Your Future:
If your employer offers a 401(k) retirement savings account, be sure to sign up and contribute the maximum to receive the employer match. Consider opening an IRA and creating a diversified investment portfolio of stocks, fixed income, and commodities. If necessary, seek financial advice from professional advisors to help you determine how much money you will need to retire comfortably and develop strategies to reach your goal.

The Bottom Line:
Financial literacy is the knowledge of various aspects of personal finance and the ability to make smart decisions about money.

It includes preparing a budget, knowing how much to save, recognizing favorable loan terms, understanding what impacts credit, and distinguishing different investment options that can be used to save for retirement.

The financial skills that come from financial literacy can help individuals handle their personal finances responsibly which, in turn, can help them protect the well-being of their financial futures.

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