Financial literacy is a critical component of personal financial management. In the United States, 40% of adults would not be able to cover a $1,000 emergency, and almost half of those would not be able to pay $400 for a similar emergency. Financially literate people learn how to save for emergencies and grow their emergency fund to three to six months’ expenses.
In addition to saving money, financial literacy is also about budgeting. When a person understands how to allocate their income, they are more likely to save, invest, and prioritize their goals. They can handle the financial ups and downs of life more effectively. The goal of financial literacy is to help consumers develop the confidence and competence to manage their own finances and to use money to create a more satisfying life.
Financial literacy also helps individuals avoid damaging their credit. It can prevent people from incurring dangerous levels of debt, which can have a detrimental impact on their credit scores. It can also help people plan for the future by learning about retirement planning and tax planning. Most individuals will borrow money at some point in their lives, and a basic understanding of interest rates, compound interest, time value of money, and loan structures will give them the confidence to make smart borrowing decisions.
In addition to budgeting, financial literacy also includes understanding how to use credit cards and other forms of payment. Developing a budget allows you to balance your income and expenses and keep track of where your money is going. It also allows you to save for emergencies and invest in beneficial investments. Financial literacy involves learning about different payment methods, including credit cards, debit cards, and checks. All of these methods will draw money from your bank account, so it’s important to be aware of how to properly allocate these funds.