What Is Financial Literacy?

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Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.

When you are financially literate, you have the essential foundation for a smart relationship with money. This can help start a lifelong journey of learning about the financial aspects of your life. The earlier you start to become financially literate, the better off you'll be because education is the key to a successful financial future.

 

KEY TAKEAWAYS

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• The term “financial literacy” refers to understanding a variety of important financial skills and concepts.

• Financially literate people are generally less vulnerable to financial fraud.

• A strong foundation of financial literacy can help support various life goals, such as saving for education or retirement, using debt responsibly, and running a business.

• Key aspects of financial literacy include knowing how to create a budget, plan for retirement, manage debt, and track personal spending.

• Financial literacy can be obtained through reading books, listening to podcasts, subscribing to financial content,  or talking to a financial professional.

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Understanding Financial Literacy

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Since about 2000, financial products and services have become increasingly widespread throughout society. Whereas earlier generations of U.S. residents may have purchased goods primarily in cash, various credit products are popular today, such as credit and debit cards and electronic transfers. A 2021 survey by the Federal Reserve Bank of San Francisco revealed that 28% of all payments were made via credit card, with only 20% being made in cash.

Given the importance of finance in modern society, a lack of financial literacy can be very damaging to an individual’s long-term financial success.

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Pitfalls of Illiteracy

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Being financially illiterate can lead to many pitfalls, such as being more likely to accumulate unsustainable debt burdens, either through poor spending decisions or a lack of long-term preparation. This, in turn, can lead to poor credit, bankruptcy, housing foreclosure, and other negative consequences.

Thankfully, there are now more resources than ever for those wishing to educate themselves about financial topics. One such resource is the U.S. government-sponsored Financial Literacy and Education Commission, which offers a range of free learning opportunities.

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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.

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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.

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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.

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Other developments in finance such as e-wallets, digital money, and P2P lending can be convenient and cost-effective but require that consumers be educated adequately to use them to their advantage.

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Why Financial Literacy Matters

It Supports Financial Well-Being

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Day-to-day living expenses, living within your means, short-term borrowing, long-term budget forecasting. To manage these and other essential financial realities properly as you go through life, you must be financially literate.

It is important to plan and save enough to provide adequate income in retirement while avoiding high levels of debt that might result in bankruptcy, defaults, and foreclosures.

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In its "Economic Well-Being of U.S. Households in 2022" report, the U.S. Federal Reserve System Board of Governors found that many Americans are not prepared for retirement. Twenty-eight percent indicated that they have no retirement savings, while about 31% of those not yet retired felt that their retirement savings were on track. Among those who have self-directed retirement savings, about 63% admitted to feeling low levels of confidence in making retirement decisions.

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Why Is Financial Literacy Important?

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Financial literacy gives an individual the tools and resources they need to be financially secure throughout their life. The lack of financial literacy can lead to many pitfalls, such as overspending and accumulating unsustainable debt burdens. This, in turn, can lead to poor credit, bankruptcy, housing foreclosure, or other negative consequences.

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How Do I Become Financially Literate?

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Becoming financially literate involves learning and practicing a variety of skills related to budgeting, managing and paying off debts, and understanding credit and investment products. Basic steps to improve your personal finances include creating a budget, keeping track of expenses, making timely payments, being prudent about saving money, periodically checking your credit report, and investing for your future.

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Let the (Financial Literacy) Games Begin.

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While not new, gamification has become an increasingly popular and legitimate way to teach students of all ages useful skills and concepts. 
 

There’s a big difference between which financial literacy lessons are valuable to a 5-year-old than a 15-year-old. To make the best financial literacy games for your kids easy to pinpoint, below are suggestions, divided by age group.

 

Grades K-5

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Before you can focus on more complicated concepts like saving and investments, kids have to learn the basic concepts of what money is and what different bills and coins are worth. Here are five more game suggestions for your little money-mavens:

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1. Learning Coins – Learning Coins from ABCYa provides kids with an introduction to what each of the different coins is, how to recognize them, and what they’re worth.

2. Money Bingo – Also from ABCYa, Money Bingo lets kids put their coin knowledge to use, along with some math skills, to fill a virtual bingo card.

3. Dolphin Feed – Once you’ve mastered those first two games, ABCYa has one more financial literacy game for students at a slightly higher level. Dolphin Feed lets you compete against other kids to see who can make the right change the fastest.

4. Escape from Barter Island – Escape from Barter Island helps kids learn just why we use money, to begin with. It teaches what bartering is and shows why it’s less practical than currency. This one does require some reading, so you might need to help the younger kids out with it.

 

Grades 5-8

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1. Financial Football – From Visa’s Practical Money initiative, Financial Football mixes financial literacy in with America’s favorite sport (for kids that prefer soccer, they have an alternate version).

2. Hot Shot Business – Hot Shot Business takes kids to Opportunity City and gives them a chance to run a popular local business – with all the challenges and successes that come with it.

3. Lights, Camera, Budget – This game puts your child in the role of a movie producer. They’ll be given a $100 million budget to create a 5-star movie.

4. Break The Bank  – Brought to you by Biz Kids. This game puts you in the role of a worker at a community bank, helping customers get good loans and save for their future. But wait, you must go against Mr. Boar and his clerks from a payday loan company. Learn the ethics of banking and debt in this fun game.

5. Hit The Road – This Oregon Trail-inspired game takes you on a road trip across America. Learn the importance of saving and creating a budget, responsible spending, and debt management.

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High school and beyond

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1. ZOGO – Get paid to learn financial literacy and earn gift card rewards from your favorite brands. Play through short modules that cover topics ranging from buying a car to investing in the stock market. It’s easy to get started. Just download the app and enter in the access code FITZSIMONSCU to start earning rewards.

2. Get a Life – Get a Life lets students pick a career and then create a budget and make other spending decisions based on the monthly salary that comes with it.

3. The Stock Market Game – Learn to play the stock market without the risk. Students can get a feel for how investing works, the risks involved, and which investments are the best choice.

4. Invest Quest – Modeled after a board game, Invest Quest helps older students test their financial knowledge to better understand how to make good investments.

5. Misadventures in Money Management – The Consumer Financial Protection Bureau created a  fun online game for teens using a graphic-novel theme. Topics covered include: avoiding impulse purchases, how debt can affect a military career, and much more.

6. The Uber Game – Can a person survive on a job in the “gig economy”? That’s what this game attempts to reveal to your students. They’ll be given an urgent financial need (such as – your mortgage of $1,000 is due in a week), and then will need to accept gig jobs from Uber in order to try and save up enough to pay their bills.

7. Payback – This financial simulation game can help teens make better life decisions. They’ll pick out careers and majors based on simulating what kinds of jobs they might find when they graduate, and how much their student loans might be.

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We can’t forget the grown-ups 

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Let’s be real. Financial literacy learning isn’t just for kids. We ‘kids at heart’ could always use a refresher on topics like managing debt, using credit cards, and protecting your identity. We’ve rounded up a few great places to start your extra-curricular learning.

1. Invest in You: Money 101 – CBNC offers this 8-week learning course to financial freedom for free and that’s not even the best part. It’s delivered directly to your inbox weekly. Talk about barely having to lift a finger.

2. Money Basics – Smart About Money’s Money Basics courses help you to form a healthy financial foundation for the rest of your personal finance journey. Each course takes approximately 45 minutes to complete and includes valuable tools and resources including worksheets, calculators, and quizzes.

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