What is Financial Literacy?
Understand the basic concepts so you can achieve success.
Experts say you need to at least a basic level of financial literacy if you want to be financially successful, but in order to do that you have to really know what financial literacy means. The more you understand the concept of financial literacy, the more effective you can be at crafting strategies to expand your knowledge. You can also become an advocate for financial literacy – particularly in the lives of your family and children.
The information below can help you understand what financial literacy is and why you need it. If you have questions or you’re facing challenges that you need assistance to overcome, call us at 1-844-402-3073 to speak with a trained credit counsellor at no charge.
Defining financial literacy
Financial Literacy is your ability to comprehend basic concepts of personal finance and money management, but you have to understand these concepts in a way that allows you to apply them in your daily financial life. So it’s not only having the knowledge, it’s also your ability to use that knowledge to get where you need to be even in the face of financial challenges.
How to apply financial literacy knowledge
Just like learning anything new, it takes more than repeating facts and definitions to really understand financial literacy on the level you need in order to be successful. Teachers know you have 6 levels that come into play with cognitive learning – which is the type of understanding you really need.
Applying these 6 levels of learning to finance, you have to:
- Know the basic terms and concepts related a particular financial topic.
- Comprehend that topic at a level where you really understand the concept and how it applies to your daily life.
- Then you Apply that knowledge to your own finances so you can build and grow a solid financial foundation.
- Once applied, you Analyze the impact of the actions you took and adjust as needed. This is where you pay close attention to the nitty-gritty details that can make or break your strategy.
- After you’ve tweaked the application, you Synthesize that into your overall financial plan. (Synthesis is essentially where you fit a specific topic into your big picture.)
- Finally, you’re ready to Evaluate your success on that particular topic so you can circle back to gain more knowledge or move on to the next topic you need to understand and incorporate in your daily financial life.
8 basic areas of financial understanding
Your financial life isn’t just one big homologous lump – it’s a well-oiled engine that helps you move forward, and it has a lot of moving parts that go into making it work smoothly. With that in mind, it can be helpful to break the whole into different areas so you can know where and how you need to focus to expand your understanding.
One way to divide your financial understanding is by breaking it into eight basic categories:
- Budgeting is your ability to understand topics that relate to daily money management. It includes concepts like: income sources, fixed/flexible/discretionary expenses, monthly payment obligations.
- Saving is your ability to set money aside and allocate funds in order to invest in your future. That means you have to understand concepts like savings accounts, interest, yield, and even investment topics like securities.
- Basic needs management is where you have the ability to handle all of the costs related to life necessities, such as housing and transportation. This means monthly bill management, and even understanding insurance.
- Banking relates to the fine details of managing your accounts. This means you need to have the ability to understand your accounts, how they work, and any fees, rates or terms that may be applied.
- Healthcare cost management can be tricky, because it involves understanding complex topics such as health insurance, deductibles, and coverage. Medical costs have a way of breaking even the most stable budgets if you don’t have a good knowledge base on this topic.
- Debt management is your ability to effectively take on debt, understand the terms and rates that apply to things like loans and your credit cards. Without a solid understanding, debt can easily overwhelm your finances.
- Credit management is your ability to manage and maintain your credit profile. That includes your credit score, credit reporting, and how you interact with the credit bureaus if you have an issue. Laws are constantly evolving to change credit management.
- Retirement planning actually incorporates several of the above topics like budgeting and saving, but then applying them the long-term financial planning that’s required to be stable in your gold years. You have to understand special concepts like 401(k) accounts and employer match programs.
By building your knowledge in these eight areas, you should be able to achieve financial stability and overcome the typical challenges that consumers can face in their day-to-day financial lives.
Why we struggle with financial literacy
Personal finance isn’t something most of us were taught in school – or if we were, we only received a few basic lessons. What’s more, with the rapid expansion of technology, some of the lessons we learned aren’t even applicable. For instance, many older consumers may have learned how to balance a checkbook – a critical skill a few decades ago that hardly comes up in today’s world.
So without a proper education, most of us start life behind when it comes to financial literacy, and then the problem is compounded by how fast the financial world is evolving. As a result, we often rely on our parents for the knowledge we need, who learned everything they know the same way. You pass down the trial and error you learned from the hard way to your kids in the hopes they have an easier time.
What you can do
You have to start by building your own knowledge base. You can use the free resources you find online to get started. Look at the eight topics above and feel out where your knowledge is lacking. If you’re not sure, you can take our Financial Literacy Test to see where you may be weak. We also offer a Financial Literacy Check List that helps you build a better outlook in 30 days.
And once you have your own knowledge base established, you should also share that knowledge with the rest of your family – particularly with your children. The more of a head start you can give them, the better off they’ll be once they get out on their own!