Guide to Financial Literacy: Definition and How To Improve
By Indeed Editorial Team
Updated September 8, 2022 | Published March 20, 2020
Updated September 8, 2022
Published March 20, 2020
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Financial literacy is a skill that can benefit professionals in any industry. Understanding personal finance can help you become more aware of how to enhance your financial standing and make effective financial decisions at work. Developing finance knowledge early in your career can also help you save money and invest wisely, which may improve your financial health during retirement.
In this article, we define financial literacy, examine its benefits and provide steps you can take to improve personal literacy in finance.
What is financial literacy?
Financial literacy is the ability to understand and apply financial management skills, like investing and budgeting. It involves being able to understand financial principles and concepts like managing debt, applying savings techniques, planning for your financial future, understanding and calculating compound interest and even understanding the principle of time as money. Financial literacy is essential for long-term financial stability, as it can help you understand how money functions in an economy and how to manipulate your personal finances to meet financial goals.
Related: 80 Common Accounting Terms
Benefits of financial literacy
Here are some of the primary benefits of becoming more financially literate:
Developing better spending habits
Literacy in finance can help you stay cognizant of your spending habits. By tracking your spending, you can manage your bills, create budgets and make plans to save for long- and short-term goals. Because you know how much you spend, you can determine whether to cut spending to reach goals or to better budget your money to have more spending money for important purchases. For example, you might cut down on credit card spending so you can pay off debt quicker.
Learning the value of a savings account
By being financially literate, you can better understand the importance of having a savings account for an emergency or major life event. You can start small by simply scheduling monthly deposits from your checking account into a savings account. You might also learn about different savings rates, the difference between annual percentage rate (APR) and annual percentage yield (APY), and what rates different financial institutions offer for savings accounts.
Related: Your Guide to Careers in Finance
Understanding advanced financial concepts
Becoming more financially literate can help you better understand advanced financial concepts, like investing, rate of return, appreciation and depreciation and inflation. Understanding these concepts helps you understand the way money moves through an economy, what factors can affect the value of that money and the best ways to manage your money to better increase its value over time. For example, you might learn about how inflation reduces the value of the dollar, causing interest rates to rise to combat the inflation.
Making better financial decisions
When you become financially literate, you can make more educated decisions about mortgages, credit cards and how to handle debt. You may also be less likely to fall victim to predatory lending, fraud and high-interest rates. When you're financially literate, you learn the skills to help with the following:
Reconciling your bank accounts
Paying off debt
Managing your money responsibly
Paying bills on time
Planning for retirement
Related: 6 Essential Accounting Skills
How to be more financially literate
While it can take some time, there are some simple steps you can take to become financially literate, including:
1. Learn about money matters
To start improving your literacy in finance, you can begin reading and researching about money matters, including investing, money management and finances. You can start with magazines and newspapers or look for books that teach literacy in finance. You may also want to look for resources online as well as podcasts and webinars that teach financial literacy, or take a college course in personal finance for a more guided learning approach.
Related: Best Careers for Finance Majors
2. Use financial management tools
Another important step to gaining literacy in finance is to use a financial management tool. There are many services available online and you can easily connect them to your checking and savings accounts, credit cards and mortgage to monitor your spending. Using these tools, you can create a budget and then monitor how effectively you're staying within the budget.
Related: How To Become a Finance Specialist
3. Ask for advice
A financial advisor can answer questions about how to handle any high-interest credit cards and other debt. They can evaluate your specific situation and make recommendations for how to consolidate and manage your finances to pay off your debt. You might also ask a friend or family member who works in finance or who has significant personal experience managing finances for help with your own financial assets.
4. Learn to budget
Budgeting is a key component of literacy in finance. Learning to create and manage a budget allows you to pay down or avoid debt, save money and plan for your future. Once you understand how to use money management tools and understand basic financial concepts, you can start applying them first with a personal budget. Create a budget for your basic expenses and start tracking spending, incomes and fixed expenses. Set strict limits for spending and review your budget monthly.
5. Determine your credit score
Once you understand how to create and manage a budget, you can determine your credit score. Your credit score is a numerical value assigned to you based on your credit history, availability, usage and any negative marks, like collections. This is a measurement of your creditworthiness lenders and creditors use to determine whether to lend you money for things like credit cards, mortgages or vehicle loans. Use an online service or request a credit report from any of the three main credit bureaus. You can also learn about:
Why credit is important
What information goes into your credit score
How to improve your credit score
6. Understand debt and loans
Learning about debt and loans is another important part of literacy in finance. Not all debt has an equal impact on credit, so learning about the different kinds of debt is important to fully understand your financial position. Study how different debts compare in terms, interest rates and credit effects. For example, a high-interest credit card may be more impactful on your credit score than a small, low-interest debt from a medical bill.
7. Invest in retirement
Being financially literate also means understanding how to plan for retirement. Saving for retirement can take a lifetime of planning and contributions, so it's important to start learning as soon as possible. Ask your employer about any retirement plans they might offer, and learn the differences between different plans, like a Roth IRA and 401(k). Then, determine how much you want to save each month to reach your retirement goals.
This article is for informational purposes only and does not constitute financial advice. Consult with a licensed financial professional for any issues you may be experiencing.
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