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Financial literacy is a comprehensive understanding of general financial topics such as personal finance management, saving, investing and budgeting. Those without financial literacy are more susceptible to fraud and long-term financial stress. Building a foundation of financial literacy and developing your financial skills can help you reach your goals.
Main Components of Financial Literacy
Financial literacy includes building a wide range of essential financial skills, which can have long- and short-term impacts on your financial stability. Those components include:
- Budgeting
- Learning how to build and maintain a budget is a solid first step to improving your financial literacy. Budgeting, which involves creating and sticking to a plan for your spending that aligns with your income and goals, allows you to plan for the future and make well-informed financial decisions. You can start by deciding how much you need to set aside for expenses and loan payments, and then determine how much you can save and invest regularly, such as each month.
- Investing
- Investing your money in the financial markets is critical to hedge against inflation and one of the surest ways to grow your wealth in the long term. You need to understand your risk tolerance, investing goals and time horizon in order to determine which types of investments — like stocks, bonds, mutual funds and ETFs — make sense for you.
- Saving
- In addition to investing, it’s important to set money aside for short-term goals and emergencies. On average, traditional savings accounts are currently earning just 0.46% in interest, but high-yield savings accounts and certificates of deposits can earn up to 5% in interest as of early 2024. Understanding the pros and cons of different types of savings vehicles is a crucial part of building your financial literacy.
- Tax planning
- Learning how your money is taxed and how taxation can impact your overall financial picture is also an important part of developing your financial literacy. Once you have this knowledge base, there are moves you can make to potentially lower your overall tax bill, like saving for retirement in a tax-advantaged individual retirement account (IRA), Roth IRA, health savings account (HSA) or flexible spending account (FSA).
- Managing credit
- Maintaining a strong credit score will make your financial life easier when you want to buy a house or take out a loan. Learning how to build good credit — like by responsibly using a credit card — is an important aspect of financial literacy.
- Managing debt
- Debt is an important part of our financial lives as it can help us finance a home, car, education and more. But debt can build up quickly if not properly managed, and high-interest debt like what you’ll accrue if you fail to pay your credit card balance regularly can take a significant toll on your finances.
Financial Literacy Resources
It’s not too late to strengthen your financial literacy, and there are free resources available to help get you started.
| Resource | Offerings |
| MyMoney.gov | Free tip sheets, guidance and tools to improve your financial literacyCalculators, budgeting worksheets and saving checklists |
| FDIC Money Smart | Free podcasts, guides and newslettersFinancial guides for specific audiences, such as kids, educators and young adults |
| Consumer Financial Protection Bureau | Specific financial guides by topic, such as credit cards, auto loans and mortgagesFinancial guides for specific audiences, such as native communities, people with disabilities and young adults. Tax guides |
Sources:
FDIC. (2024, February 20). National Rates and Rate Caps. Retrieved from https://www.fdic.gov/resources/bankers/national-rates/index.html
National Library of Medicine. (2023, November 14). Impact of Financial Literacy, Mental Budgeting and Self Control on Financial Wellbeing: Mediating Impact of Investment Decision Making. Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10645357/
National Financial Educators Council. (2023). Financial Illiteracy Cost Americans $1,506 in 2023. Retrieved from https://www.financialeducatorscouncil.org/financial-illiteracy-costs/
