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What Are the Benefits of Financial Literacy?

Samantha Rose
Samantha Rose is a personal finance writer covering financial literacy for OppU. Her work focuses on providing hands-on resources for high school and college-age students in addition to their parents and educators.
Read time: 8 min
Updated on December 22, 2021
Financial literacy unlocks the door to financial success.

The main benefit of financial literacy is that it empowers us to make smart financial decisions. It provides the knowledge and skills we need to manage money effectively—budgeting, saving, borrowing, and investing. This means that we're better equipped to reach our financial goals and achieve financial stability.

The particular benefits of financial literacy will differ depending on a person’s circumstances, but some common situations in which financial literacy can help include:

  • Saving for retirement.
  • Creating and sticking to a balanced budget.
  • Purchasing a home.
  • Selecting insurance.
  • Reducing expenses.
  • Investing.
  • Buying a car.
  • Saving for college.
  • Managing debt.
  • Using credit cards.

Why financial literacy is important

Financial literacy is important because it equips people with an understanding of basic financial concepts to inform their real-world financial decisions. With this knowledge in hand, they’re better able to manage their money, make sound decisions, and maintain healthy spending and budgeting habits, which over time can lead to financial wellness.

The importance of financial literacy becomes especially clear when considering the financial challenges that many people face:

  • 78% of Americans live paycheck to paycheck.
  • Student loan debt is US$1.5 trillion for more than 44 million borrowers.
  • Credit card debt is up to a record $1.04 trillion.
  • 21% of Americans aren’t setting aside any money for short-term or long-term goals.

To address these issues, leaders in education, business, and the government are stepping up efforts to provide financial education and expand financial literacy across the United States.

What it means to be financially literate

Put simply, to be financial literate means someone has an understanding of essential financial concepts. These include:

  • Budgeting.
  • Saving.
  • Credit.
  • Debt.
  • Insurance.
  • Financial decision-making.

The second part of financial literacy is using financial knowledge to inform financial decisions and establish healthy money-management habits. Financial literacy skills include:

  • Creating a budget.
  • Calculating interest.
  • Lowering costs by reducing “want” purchases.
  • Evaluating loan terms.
  • Comparison shopping.
  • Doing taxes.
  • Saving money.

Financial literacy knowledge and skills contribute to smart financial decision-making and the ability to carry out the decisions that are made.

How to become financially literate

Financial literacy is acquired by learning financial concepts and practicing them. Many people receive informal financial education from family members or role models—parents who teach their children how to write a check, for instance. However, formal financial instruction from a trusted provider offers a more comprehensive and reliable education. Schools, banks, and nonprofit organizations are just a few of the sources that offer financial education. Online resources include the following:

    • EconEdLink: Classroom-tested online finance lessons designed for K-12 students but great for learners of all ages.
    • InCharge: A nonprofit dedicated to empowering consumers through personal finance education and educational partnerships. Online resources include ebooks, calculators, and games.
    • MoneyWi$e: A partnership between Consumer Action and Capital One, this program combines free, multilingual financial education curricula with regional meetings and roundtables to train community-based organization staff.
    • Better Money Habits: A collaboration between Bank of America and Khan Academy, this site includes animated videos to cover financial literacy basics as well as more in-depth topics.
    • Money Smart: The FDIC’s program provides free tools for people of all ages to increase their financial literacy. Resources include lesson plans, videos, podcasts, and games.
    • OppU: Standards-aligned online courses that teach the fundamentals of personal finance: spending, budgeting and saving, credit, and debt and loans.

Frequently asked questions about financial literacy

What is financial literacy?

Financial literacy by definition is having the knowledge and skills to manage money wisely. It’s a broad definition, but it takes on different meanings for different people.One of the most common understandings of financial literacy is for people to have all the resources and tools needed to handle their personal finances while understanding the impact of their decisions on financial stability. For instance, a financially literate person knows how an education can shape career prospects, which then impacts salary and, ultimately, quality of life.

Why is financial literacy important?

Financial literacy is important because it equips people with the knowledge and skills needed to manage money effectively. What does this mean? Basically, financial literacy ensures that every financial decision in a person’s life is backed by a rationale that empowers them to feel confident and secure in their choice.

Ask the experts: What are the benefits of financial literacy?

Alicia Rose Hudnett, owner of The Business of Your Life, LLC

What are the benefits of being financially literate?

  • More control over your personal finances when you understand financial basics, which can lead to more overall confidence, as finances affect everyone's life in every way.

  • More control means possibly less debt as you have a better sense about the impact of debt on your budget, cash flow, savings, credit report….

  • Understand the importance of saving and starting to save as soon as possible, even if it's just a small amount.

  • More likely to set financial goals for yourself and have the desire to work toward those goals, which often means putting off the wants of today to save for the needs of tomorrow.

Alicia Rose Hudnett Alicia Rose Hudnett is a personal finance expert and financial planner with a certificate in financial planning, who is currently a candidate for CFP® certification. With a strong passion for personal finance and financial literacy, she believes money management skills are important life skills. The core of what she does is teach best practices in personal financial planning to individuals looking for guidance on how to become financially stable and build their personal wealth.
Jason B. Ball, investment adviser representative at Ball Comprehensive Planning, LLC

What are the benefits of being financially literate?

“Simply the ability to be able to evaluate a financial situation.”

For example:

  • Business owners being able to read financial statements to make business decisions.

  • Individuals and families being able to understand their personal balance sheet and interest rates on home [loans], auto [loans], and credit cards.

  • Understand the fees and expenses of their retirement accounts.

  • Understand what is meant by the diversification of investments in Modern Portfolio Theory.

Jason B. Ball Jason B. Ball, is a Certified Financial Planner™, Chartered Financial Consultant(R), and Chartered Life Underwriter(R) located in Portland, OR. He is the principal and founder of Ball Comprehensive Planning, LLC, and a past president of his local financial planning association. A growth mindset and a passion for learning are at the center of his financial planning philosophy.
Steffa Mantilla, owner of Plantsonify

What are the benefits of being financially literate?

  • [Financially literate people] are more secure consumers. They're able to purchase a house and plan for various upgrades. If they're financially secure, then they may spend more for higher-end options since they know they can afford it.

  • [Financially literate people] are able to plan and have enough saved for their retirement. They won't need to pare down their lifestyle in retirement and can continue to live on the same plane they're currently in. This would open the door for more industry goods geared towards seniors.

  • Financially literate consumers are also less likely to default on payments.

Steffa Mantilla Steffa Mantilla is a debt-payoff and wealth-building strategist at Plantsonify. After paying off $80,000 of her own debt, she helps teach families how to save money, live a debt-free lifestyle, and build wealth. Additional money tips and motivation can be found on Steffa's YouTube channel.
Logan Allec, owner of Money Done Right

What are the benefits of being financially literate?

  • The first benefit of being financially literate is the ability to recognize a bad financial deal. I’ve had unscrupulous financial advisors try to talk me into financial decisions that would benefit them and not me. Due to my financial literacy, I knew to walk away from those deals.

  • The second benefit of financial literacy is the lower cost I pay for my bills since I make less financial mistakes. Due to financial literacy, I know the negative impact missing a credit card payment will have on my monthly bills. I’ll make sure never to miss that payment and will always try to avoid paying interest.

  • The third benefit of financial literacy is the peace of mind that comes from knowing I’m planning for retirement. Retirement is not something that worries me because I know how to create a plan that will put me in the best possible position to be prepared for my later years in life.

Logan Allec Logan Allec is a CPA and owner of the personal finance website Money Done Right. After spending his twenties grinding it out in the corporate world and paying off more than $35,000 in student loans, he dropped everything and launched Money Done Right in 2017. His mission is to help everybody—from college students to retirees—make, save, and invest more money. Allec resides in the Los Angeles area with his wife Caroline.

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