Posted on Jul 2, 2022

Financial literacy is a set of knowledge and skills that relate to finances, especially personal finances. Having financial literacy can help you in your work life and in your personal life, enabling you to plan and allocate resources for the future and learn to better manage money. In this article, we explain what financial literacy is, why it's important and how financial literacy can benefit you.

What is financial literacy?

Financial literacy is having the knowledge and skills to make effective and positive decisions about financial resources. Money management requires financial literacy to be effective and includes things like saving, budgeting, investing and managing credit. Financial literacy involves learning how to spend your money effectively, how to save well and how to invest what you can.

Why financial literacy is important

Learning financial literacy can remove some stress that can come with financial issues and help you establish a financial plan for your future. If you are financially literate, you often have less debt and more savings. You have also learned a skill that can be effective for budgeting and spending at work.

What are financial literacy programs?

Financial literacy programs are available through a variety of sources. There are some financial literacy programs offered through schools, including high schools and universities. Your workplace might provide financial literacy courses to help employees learn these skills. You may also find financial organizations that offer free or low-cost financial literacy programs. You might meet with a financial advisor individually, or you might be in a class with multiple people. These programs often go through a step-by-step process towards learning necessary financial skills using your actual financial situation.

Benefits of financial literacy

There are many benefits of financial literacy, including:

Established budget

One of the first steps in learning financial literacy is to create a budget that fits your income and expenses, and having a budget can guide you on how much money you have after any necessary expenses like rent or mortgage, utilities, transportation costs and food. Budgets can seem overwhelming if you're new to financial literacy, but they are often as simple as listing your income and expenses and making a plan for the money you have left over.

For instance, if you have an extra $300 a month after all your bills and expenses, you might decide to save $100, spend $100 on something fun and invest $100. If you don't have a budget, you may not be aware of what you have to spend or save after you pay your bills.

More savings

People who are financially literate often have the skills to save more effectively. Using your budget, you can establish a plan for how to save money. You might have a particular goal for saving, like to make a big purchase, or you might simply want to save in case of an emergency. Financial literacy can teach you what you need to know to reduce your spending so that you have more to save. Establishing a savings account can mean that you may not need to turn to credit cards or loans in an emergency.

Less unnecessary spending

Using financial literacy to evaluate your spending habits can allow you to see where you are spending too much or where you might reduce your spending. Financial literacy and a budget can show you how even small expenses might add up. By examining your spending, you can reduce that spending in areas that aren't necessary or that are less important to you than your financial goals.

For instance, you may find that you're spending more than you'd like on takeout meals every month and that you can reduce your spending in this area to once a week at most. Through reducing your unnecessary spending, you find that you're saving $250 a month that you can then decide the most effective way to use.

Retirement plan

Creating a comprehensive retirement plan can allow you to retire when you would like with the right amount of money you'll need to live the retirement life you'd like. Using financial literacy, you can examine your current lifestyle and earnings and compare it to what you'd like your retirement to be like. From there, you can look at what retirement plan options are available through your employer, like a 401(k), or other retirement savings options like IRAs.

Many retirement investment accounts have calculators so you can assess how much you need to save based on your desired retirement lifestyle, possible inflation and cost-of-living increases, your current age and your ideal retirement age. Having a retirement plan can allow you to live out your post-work dreams that might be more challenging without a plan.

Investment accessibility

Investments can be a great way to grow your wealth, but they may seem daunting to understand. However, there are many resources that can teach you how investments work and the best way to get started with investing. Most retirement plans like 401(k)s and IRAs are investment plans, but you can also invest outside of a retirement plan. Investments can include stocks, bonds and property. Through your financial literacy skills, you can decide what the best ways are for you to invest.

Debt management

Debt is a regular part of many people's lives in the modern world, and it can be challenging to manage effectively. Financial literacy can help you understand the best ways to reduce your debt so that it's more manageable. Not all debt is necessarily bad, but being aware of how debt affects your finances, including your credit score, is quite important. You may find that you want to create a plan for reducing certain types of debt in order to live more comfortably, and financial literacy is a great path to doing that.

For instance, you might have a $1,500 credit card balance, a $3,000 credit card balance, a $275,000 mortgage and $25,000 in student loan debt. Each of these types of debt affect your credit score and financial health differently. Learning exactly how is helpful for planning your budget and future.

Less stress

Financial issues can be stressful, so learning financial literacy and being careful with your budget and debt can reduce this stress. It can also help you discover a financial plan for your future that reduces some of your uncertainty about the future. Less stress is a benefit for all areas of your life, as it can positively affect your personal and professional life.

Original article: Why Financial Literacy Is Important for Your Career