What Is Financial Literacy?

Quick Answer

Financial literacy is the knowledge and ability to manage your money in a way that helps you grow stability and feel confident and resilient. Key aspects of financial literacy are budgeting, saving and managing debt.

Men using laptop computer and texting on mobile phone.

Financial literacy is the confident understanding of concepts including saving, budgeting, investing and debt that leads to informed financial decisions and stability.

Not only does increasing your knowledge of money matters make it easier to manage your finances, but it can also help you lower your stress levels: Knowledge of key financial concepts is tied to less financial stress and anxiety, according to a Global Financial Literacy Excellence Center survey on financial anxiety.

In other words, increasing your financial savvy can help you boost your overall well-being. Read on to learn more about what financial literacy is, why it's important and steps you can take to become more financially literate.

What Does It Mean to Be Financially Literate?

Being financially literate means feeling empowered with the knowledge and skills you need to manage your money effectively. Being equipped with the understanding you need to make effective money choices is key to building a stable financial life.

Financial literacy in action can look like tracking your spending, budgeting, saving for emergencies, setting aside a portion of your income for retirement and avoiding unnecessary debt.

Learn more >> Ways to Improve Your Financial Health

Why Is Financial Literacy Important?

Financial literacy is important because it supports financial well-being, or a confidence in your ability to manage your money well. Everyone experiences financial ups and downs, but financially literate people may be more likely to:

  • Manage money with a budget
  • Save more money for the future
  • Manage credit well and avoid unnecessary debt
  • Feel financially prepared for emergencies
  • Feel less stressed about money
  • Feel more financially secure overall

How to Become Financially Literate

To become financially literate, start reflecting on your current money mindset. It can be easy to let old patterns of thinking, such as the idea that you're "just not good with money," stand in the way of taking steps to improve your money management skills now.

Fortunately, there are small steps you can take to start building financial knowledge, and resources that can help you along the way.

1. Look for Free Resources

To start, take advantage of free tools that might already be available to you. For example, your bank, credit union or credit card issuer might track your spending patterns on its website or app. Also, check out resources from Experian, such as free online credit monitoring.

You can use these tools to get an initial grasp of where your money is going and where you stand with your credit.

2. Explore Employer Resources

Find out whether the company you work for offers free financial counseling or an employee financial wellness program. You may be able to speak with a financial professional as part of your suite of workplace benefits, which can give you early insight into the areas you most need to focus on (like saving, retirement, budgeting or debt reduction).

For example, some workplaces offer free financial planning and counseling sessions. Ask your employer what's available to you.

3. Look Into Credit Counselors or Financial Advisors

Expert help is also available from credit counseling agencies. Working with a certified, nonprofit credit counselor can help you come up with a strategy for managing debt and creating a budget that works for you.

If you aren't struggling with debt but want targeted advice on investing for the future, consider working with a financial advisor. They can help with financial goal setting, investing, tax planning, saving for college and retirement, and paying down debt.

4. Check Out Nonprofits and Other Agencies

Seek out resources from well-regarded nonprofits and agencies. They can teach you the basics about finance on your own time. Some go-to organizations include:

Another place to check for free financial literacy resources is at local community hubs; for example, many libraries offer personal finance programming to patrons.

Key Components of Financial Literacy

Here are the five foundational pieces of financial literacy to learn about first:

Budgeting

Controlling overspending and making conscious choices about where your money goes are crucial for building financial stability. A budget is a blueprint for how you'll get there. It's a plan for how you'll direct your income toward affording your expenses, live within your means and meet your savings goals.

How to start budgeting:

Saving

Spending less than you earn and putting the difference into savings helps you build security and achieve goals down the line.

Generally speaking, your first order of business should be setting up an emergency savings fund and aiming to keep around three to six months' worth of expenses socked away. Beyond setting aside money for unexpected expenses such as urgent car repairs, saving in advance can help you afford things you need or want, from holiday gift purchases to next summer's vacation, without going into debt.

Fact: According to the Federal Reserve, 54% of all adults had three months' worth of emergency savings in 2023. The average savings account balance for families was $8,000 in 2022, according to the latest Survey of Consumer Finances study.

How to improve your saving skills:

Earn Money Faster

Find High-Yield Savings Accounts

Investing

Beyond saving for the short term, start investing for large future goals, such as retirement.

You can sign up for a retirement account, such as a 401(k) or individual retirement account (IRA), and direct a portion of each paycheck into it to start saving for retirement now. That's even true if you only work part time.

Experts recommend putting 10% to 15% of your income into your retirement investments, but even starting smaller—at 5% or 6%, for example—is a good move. If your income increases over time, try to up the percentage you invest.

Example: For the past 10 years, the stock market has had a 12.8% annualized rate of return. At this rate, if you invested $1,000 in an index fund at age 20 and contributed $200 each month, then by age 62 your investment would grow to $3.3 million.

How to start investing:

Learn more >> How to Start Investing

Managing Debt

For better or worse, debt is a common part of financial life. People borrow to achieve any number of goals. You might take out student loans to attend college, an auto loan when you need a new car or a mortgage when you're ready to buy a house. You might also use a credit card or a personal loan when you want to finance a purchase and pay it back over time.

But debt can also be destructive to your finances. If you fall too deeply into debt, whatever the reason, getting out can be challenging—plus get in the way of reaching your other financial goals.

Fact: As of February 2024, the average monthly debt payment was $1,225; $644 for auto loans, $202 for credit cards and $1,990 for mortgages, according to Experian data.

How to improve your debt management:

Building Credit

Financial literacy can help you grow and protect your credit score. By learning what impacts your credit, you're better situated to make borrowing choices that contribute to a high score, and to avoid choices that can do damage.

People with more developed financial literacy skills are less likely to report making the following potentially negative credit moves, according to a FINRA National Financial Capability Study survey:

With a good or excellent credit score, you may be able to qualify for lower-interest-rate loans and credit cards, credit cards with attractive and money-saving perks, and other financial products. This gives you the chance to choose the best deal when seeking a new credit product.

How to increase your credit skills:

Learn more >> How to Build Credit

States That Require High School Financial Literacy

The number of states with legislation requiring students to take a course in financial literacy in order to graduate high school has grown over time. A 2024 survey conducted by financial literacy nonprofit Council for Economic Education (CEE) found that 12 states have added financial literacy curriculum requirements since 2022.

Requiring personal finance education in state curricula promotes equity in access to financial knowledge, according to CEE president Nan J. Morrison. In a 2022 survey from the National Endowment for Financial Education, 80% of respondents said they wished they had been required to take a personal finance course in high school.

While support for financial literacy in schools is growing, not all states have adopted policies. To see what's required in your state, check out the breakdown below.

The Power of Financial Literacy

Getting up to speed on the basics of personal money management can make navigating financial decisions easier. That can mean keeping a close eye on your bank and credit card accounts so you'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.

Ultimately, the best outcome of your commitment to financial literacy will be increased confidence in yourself. When you have the knowledge to make informed decisions, you'll trust your ability to make sound financial moves and avoid too much debt or risk. From there, you can create and pursue financial goals that will most support your vision for a happy life.