Financial literacy is the possession of skills that allows people to make smart decisions with their money. Although understanding stats and facts about money is great, no one has truly grasped financial literacy until they can regularly do the right things with money that lead to the right financial outcomes. When you have this skill set, you’re able to understand the major financial issues most people face: emergencies, debts, investments, and beyond.
Financially literate people know their way around a budget, know how to use sinking funds, and know the difference between a 401(k) and a 529 plan. Here are just a few of the concepts financially literate consumers have mastered:
Budgeting
Most Americans live paycheck to paycheck, and it’s largely because of a gap between what the math says they can afford and what they actually spend. Financial literacy can make people habitual budgeters who are willing to save for their goals and delay gratification to have peace of mind today and in the future.Emergencies
Only 44 percent of Americans would be able to cover a $1,000 emergency today. About 40 percent wouldn’t be able to cover a $400 emergency. People who become financially literate understand the wisdom of saving for those times when life happens.Debt
In addition to mortgages, which amount to nearly $9 trillion in debt nationwide, Americans are burdened with auto loans, credit cards, and student loans. The Federal Reserve Bank of New York reported in 2018 that the total consumer debt in the United States had reached $3.95 trillion. To see how that debt load impacts daily living, consider the fact that Northwestern Mutual reported that 40 percent of Americans spend up to half of their monthly income on debt payments. A big part of financial literacy focuses on understanding how the time and money people spend in paying off debt hurts their ability to invest in their future.
