Financial Literacy

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Why Is Financial Literacy Important?

The lack of financial literacy can lead to a number of pitfalls, such as accumulating unsustainable debt burdens, either through poor spending decisions or a lack of long-term preparation. This, in turn, can lead to poor credit, bankruptcy, housing foreclosure, or other negative consequences.

What Does It Mean to Be Financially Literate?

The goal of financial literacy is to establish a feeling of control over your finances while also using money as a tool to freely make choices that build greater life satisfaction, according to a 2015 report by the Consumer Financial Protection Bureau (CFPB). Additional goals include the ability to navigate unexpected issues like job loss and to set and work toward financial goals.

When you’re financially literate, you understand how to allocate your income toward various goals simultaneously—not just to ongoing expenses, but to savings, debt repayment and an emergency fund, too. You have the tools to thoroughly research and evaluate loans, credit cards and investment opportunities. Even if you don’t have a lot of disposable income to help you reach all of your financial goals, financial literacy will help you know how to prioritize them and make strides when you’re able to.

Initial financial literacy in action can look like:

  • Increasing your retirement savings rate every time you get a raise
  • Maintaining three to six months’ worth of expenses in an emergency fund, and replenishing it after you’ve withdrawn money from the account
  • Comparing promotional periods on balance transfer credit cards so you have an extended time to pay off debt
  • Checking your credit report regularly

Why Is Financial Literacy Important?

Financially literate consumers not only manage money with more confidence, but also have a better chance of handling the inevitable ups and downs of their financial lives by understanding how to prevent and manage issues as they arise.

That can mean keeping a close eye on their bank and credit card accounts so they’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. On the other hand, financial literacy can help consumers save diligently for things that matter to them, such as a vacation or their child’s college education.

Here are the ways financial literacy can affect your life:

  • Understand how much you earn and spend. When building financial literacy, making a budget is one important way to establish a true understanding of your income and expenses. Once you have a budget, you can continue to track spending and revisit your spending plan regularly.
  • Repay and avoid debt. Seeking out the lowest interest rates when comparing loan terms can save a substantial amount over time, and so can paying off credit card balances each month so you don’t accrue interest charges. If you already have debt, financial literacy can help you choose the best method to get out of debt.
  • Protect yourself from debt and bankruptcy. A crucial way to prevent debt from building is to create an emergency savings account. A financially literate saver know show much to set aside—ideally three to six months’ worth of expenses—and aims to keep it at that level at all times.
  • Work toward a secure retirement. Whatever your other short-term plans, save for retirement at the same time. When you’ve become financially literate, you’ll have a better idea how much to save, what type of retirement you want and how to get there.

The Power of Financial Literacy

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

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