Why Is Financial Literacy Important?

why is financial literacy important

The unfortunate truth today is that very few people are financially literate. They don’t fully understand finances, even with the number of educational achievements they may possess. 

The lack of foundation and teaching on finances makes it challenging for many to reach their goals. They know little about saving and investing, leading to many mistakes throughout their journey.

FINRA releases a short financial literacy test annually to test consumers' knowledge. These include understanding compounding and inflation.

Out of five questions, approximately 33% scored at least four correct. That means there is still a large gap to fill with financial literacy.

It doesn’t help that society promotes many financial products without educating the people. They offer them loans, and credit cards, making it easy for someone to drown in debt. 

A lack of financial knowledge can lead to trouble. This is also why many lottery winners lose most of their winnings a few years later.

Financial literacy is a long-term journey of understanding different concepts. One has to take steps to ensure an understanding of their financial options because there are so many things one needs to manage.

Knowing about retirement accounts, debt management, and budgeting can lead to a more comfortable life.


What Is Financial Literacy?

Financial literacy refers to the knowledge that allows you to make responsible decisions with money. It includes your understanding of debt, credit, and many other financial concepts.

A person with financial literacy understands budgeting, investments, and debt. The more you know about these topics and apply them, the better your financial situation.

Financial literacy is a concept that’s a challenge for many to understand, no matter the country or the economy. Data shows that even people with high incomes can have similar problems with their literacy as much as lower-income consumers.

Education also doesn’t factor in as much because many financial concepts needed for life aren't found in the classroom.

While there are many things to consider and learn with finances, you can boil it down to these skills. Knowing about these can help a person reach their financial goals:


  • Credit score: Knowing how to check, increase, and prevent it from decreasing.
  • Budgeting: The ability to create a budget suitable for your lifestyle, allowing you to live within your means.
  • Bills and Debt: Knowing how to allot money to pay for necessities and minimizing debt in your life.
  • Savings: Knowing how to save money for emergencies and long-term goals. This includes an understanding of the different financial vehicles that can accelerate savings.


Many who lack financial literacy often find that money is a source of anxiety. There are even some studies that imply that finances can be a bigger source of stress than a trip to the dentist.

It also shows that pursuing financial literacy can lead to more peaceful days. You can even reach a point of deep financial literacy that keeps you grounded, even in times of turmoil.


Why Is Financial Literacy Important?

There can never be any overemphasis on the importance of financial literacy. With knowledge, you can easily avoid any traps that can lead you to a tricky situation. 

No one wants to be deep in debt, and no one wants to be a scam victim. Yet it happens, all because people do know little about financial matters.


A poorly made decision with your finances can set you back several years. While you may feel like the opportunities have ended, it’s never too late. 


There are also many ways to recover as you increase your literacy. You’ll have the skills necessary to help you make informed decisions that impact your financial future. 

Let’s look deeper into the effects that financial literacy can bring:


1. Avoid the Pitfalls of Bad Financial Habits

It’s easy to get encouraged by get-quick-rich schemes like Ponzi offers or gambling websites. While there is a consensus that they are negative, a person without financial literacy can get lured by the traps these places set. 

They convince you that it is possible to achieve your financial goals at little cost. Then once you have committed your money to them, they will keep draining your resources until you have nothing left.

With financial literacy, you’ll understand why these are bad decisions and how the odds are against you. You’ll also find other options that will provide more assurance for your financial future. 

They may not be as exciting as betting it all, but you’re not losing your money in one second.


2. Increase Your Odds of Fulfilling Financial Goals

A lack of financial literacy often breeds irresponsibility. Adults who don’t know anything about finances will pass on their misconceptions to their children. 

This is why we see a cycle of bad financial habits circulating among all classes. You can break out of this cycle by learning more and increasing your knowledge about finances.

From here, you can start fulfilling some of your goals, such as:


3. You’ll Have a Better Grasp of Financial Emergencies

Urgent and unavoidable situations can arise. It may be because of a medical emergency, job loss, recession, or other unexpected issues. Whatever it is, a financially literate person can use their knowledge to look at the available options. 

They’ll understand that there is a way out of their situation.

A financially illiterate person may give up there. In another scenario, they may fall prey to shady businesses that want to capitalize on their situation.


4. Financial Literacy Is Empowering

Information is power, and the same is true in the financial world. The more you know, the more weapons and tools you have ready for every situation.

A person with a lot of money but no knowledge about the financial world is treading dangerous waters.

We go to school to empower us in various areas and equip us for our future. For the same reason, we should pursue financial knowledge to prepare us because money is a big part of our life whether we acknowledge it or not.


How to Become Financially Literate

People enter the financial world with different levels of literacy. Even then, the methods of improving it remain the same. 

Some people have more understanding of several topics than others. For example, someone may know how to quickly pay off their student loan debt, while others may understand budgeting better.

It’s crucial to start somewhere. You don’t have to learn everything in one go.


“An investment in knowledge pays the best interest.” - Benjamin Franklin


The best thing you can do is look at your financial situation and see where you are struggling.

Are you living paycheck after paycheck? Then you might want to learn more about budgeting and savings. 

Do you want to grow your money? Investing may be the thing to do. 

Here are some of the ways to get you started:


Financial Podcasts

Podcasts are a great way to increase your knowledge. You get information straight from successful people who have more literacy than you. 

The best thing about podcasts is that you can listen to them while doing other mundane tasks. Include them when you’re out for a jog or walking your dog. 

You can even do them while doing housework or when you’re running errands.

There are many financial podcasts, and the best way to start is to choose a topic that interests you. It may be something you have heard of or a personal thing you’re struggling to overcome.

Even an hour of listening daily will lead to leaps and bounds of financial knowledge.


Read Financial Articles Daily

A financial article a day can keep debt away. There are many trusted sources to get your financial information, with businesses catering to these people. 

Even an investment company can provide sound financial advice as they promote its expertise.

Find two to three websites to browse daily as a part of your financial literacy improvement routine. Check the website whenever they have something new posted and try to apply their knowledge. 

You don’t have to read loads of content as it will only overwhelm you. Small tidbits of improvement can have an impact on your life.

Another option is to subscribe to newsletters from these websites if they offer any. It reduces the need for regular checking, as you’ll get any new articles sent straight to your email. 

With this method, you’re always informed and it’s easier to check these things through your mail.


Tackle a Personal Finance Book

When it comes to personal finance, there are many books to help you start your journey (or continue it). It’s easy to find high-quality books as you have online reviews to check if the book is worth your time. 

There are many topics, from habits to improve your strategies to practical applications like budgeting.

You don’t have to rush with books either. Buy one and read a chapter daily, building a habit of improving your financial literacy.

It will also give you enough time to think and apply the new things you’ve learned. You’ll start to see improvements in your finances as you progress.


Learn a Budget Style and Try to Apply It

Budgeting often starts as a trial or error process because some strategies may work better for others. You want to learn one of them and begin applying them to your finances to see if it has a positive effect.

There are many personal budget types, so you get to pick the one you want to try. A standard choice would be the 50/30/20, recommended by many financial experts.

From there, you can find numerous variations or even extreme budgets that work well for specific people. For example, you want to accelerate your savings, so going on a saving budget may work for you for several months.


Check Social Media

Social media is one of the best tools to improve financial literacy. A search on Twitter, LinkedIn, or YouTube can lead you to people that have a deep understanding of finances. 

You can find one with a personality that matches you or is talking about a topic you want to improve. It then networks into others as you’ll discover other experts connected to the first person you check.

Video guides are a popular option today, and it’s easy to find good ones, thanks to the comments section. You’ll see right away if the advice isn’t legitimate or if it’s something that has helped people.

Another option is to go on Facebook and look for a group that matches your goals. These groups will likely have members who have gone through what you’ve experienced.


Consult a Professional

When you’re serious about making a financial change, consulting a professional is one way to do it. For example, an adviser can help you set a plan for investments or retirement. 

You will invest in their skills to help you with your goals. Many professionals can help you, from accountants to portfolio managers.


A Credit Union that Cares

An option for those wanting to improve their financial literacy is to join an organization that cares for their well-being. 121 Financial Credit Union serves its members first and helps them reach their goals. 

To that end, there may be products there to help you as you continue to improve your financial literacy. Contact us today to learn more about what we can offer you.

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