What Does It Mean to Be Financially Literate?
The goal of financial literacy is to establish a feeling of control over your finances while also using money as a tool to freely make choices that build greater life satisfaction, according to a 2015 report by the Consumer Financial Protection Bureau (CFPB). Additional goals include the ability to navigate unexpected issues like job loss and to set and work toward financial goals.
When you’re financially literate, you understand how to allocate your income toward various goals simultaneously—not just to ongoing expenses, but to savings, debt repayment and an emergency fund too. You have the tools to thoroughly research and evaluate loans, credit cards and investment opportunities. Even if you don’t have a lot of disposable income to help you reach all of your financial goals, financial literacy will help you know how to prioritize them and make strides when you’re able to.
Financial literacy in action can look like:
- Increasing your retirement savings rate every time you get a raise
- Maintaining three to six months’ worth of expenses in an emergency fund, and replenishing it after you’ve withdrawn money from the account
- Comparing promotional periods on balance transfer credit cards so you have an extended time to pay off debt
- Checking your credit report regularly
Why Is Financial Literacy Important?
Financially literate consumers not only manage money with more confidence, but also have a better chance of handling the inevitable ups and downs of their financial lives by understanding how to prevent and manage issues as they arise.
That can mean keeping a close eye on their bank and credit card accounts so they’re aware of potential fraud as soon as possible, or being able to recover from a costly unexpected car repair quickly thanks to ample cash savings. On the other hand, financial literacy can help consumers save diligently for things that matter to them, such as a vacation or their child’s college education.
Here are the ways financial literacy can affect your life:
- Understand how much you earn and spend.
- Repay and avoid debt.
- Protect yourself from debt and bankruptcy.
- Work toward a secure retirement.