To be literate in something means to have considerable knowledge or skill in that field.
If you’re reading this, you’re probably literate in reading the English language. You may be technology literate, data-literate, or literate in proper health care.
But are you financially literate?
Why is financial literacy important?
Possessing financial literacy means you understand and can apply financial concepts toward better money management and wealth creation. For example:
- Have you created a budget and do you stick to it?
- Does your budget include long-term savings and an emergency fund?
- Do you know your credit score and what can improve or hurt your score?
- Do you know the risks of overusing credit cards and of making only minimum payments on your balance?
- Do you understand the concepts of compound interest and the time value of money?
- Do you know the types of insurance you need to protect yourself financially?
Financial literacy isn’t the same as being wealthy. There are plenty of rich people with little financial literacy, just as there are people who practice financial literacy with only average income.
So why is financial literacy important? It’s not just because money is required for all of our basic living expenses. Because people deal with money every day, having financial literacy can improve a person’s quality of life.
No matter how much you earn or how much you have, financial literacy can result in:
- Less conflict
- Less anxiety
- More freedom
Let's take a closer look at these three reasons why financial literacy important.
Financial literacy means less conflict
Being financially literate won’t eliminate conflict in your life. But it can minimize strife about money.
One recent survey showed that about 48 percent of Americans who are married or living with a partner say they argue with the person over money. In addition, about 41 percent of divorced Gen Xers and 29 percent of Baby Boomers say they ended their marriage due to disagreements about money.
It isn’t just between couples that money can lead to discord. Being financially illiterate can cause conflicts with friends, parents, children, siblings, and business associates. People tend to avoid relationships with those they know have poor financial habits. And if your financial mismanagement leads you to borrow money from friends or family, that often creates more tension.
Compared to other sources of conflicts, disputes over finances are more difficult to resolve than other types of arguments.
Financial literacy means less anxiety
Money doesn’t buy happiness. But it can minimize stress. This, in turn, can lead to better happiness.
Money stress comes in many forms:
- Not having enough to pay the rent
- Lacking the funds to cover an unexpected expense like a car repair or medical bill
- Overdrawing your checking account
- Dodging calls from bill collectors
- Fighting with your spouse or partner about money
- Worrying about paying bills while you’re disabled and unable to work
- Wondering if you have enough for retirement
Being financially literate means you have a budget for expected and unexpected expenses. You spend less than you earn so there’s always money left over for a rainy day. And you’re prepared for whatever the future holds, whether it’s a disability, critical illness, or period of unemployment.
Financial literacy means more freedom
Most people have dreams. Some want to start a business. Others want to travel. Maybe there’s a specific piece of real estate you have your eye on.
Financial literacy makes it possible to pursue those dreams. You can save enough to start a business and support yourself during those early growing pains. Having a budget enables you to save enough out of each paycheck to fund an annual vacation or a special trip every five years or so. Fiscal management gives you a better credit rating, which means you can get a mortgage on that dream property.
Financial literacy doesn’t just help with big items. If you practice regular fiscal discipline, you have the freedom to go out with friends without worrying about having enough to pay your bills. It means you don’t have to rely on family members for money. You get to stay out of bankruptcy court, which can affect your ability to obtain loans or get a job later on.
Financial freedom isn’t just about the ability to buy things. What if someday you want to make a career change that requires additional schooling or that may reduce your income? Failing to save money and/or saddling yourself with too much debt makes it more difficult to make such a move.
How to improve your financial literacy
Two ways to become fluent in any skill are education and practice.
There are a number of resources available to learn better financial management. Read books, blogs, and financial newsletters. There is also plenty of financial content available on radio and podcasts. If you want a deeper dive, you can find a number of online classes or seminars.
Practicing financial literacy can start by creating a budget.
No matter how much or how little you earn, you need to save money. Having money in savings helps you deal with emergencies and unbudgeted needs. It also minimizes the need to borrow money and pay interest on credit cards.
Saving money is easier if you know where and how much you spend on household items, bills, and other expenses. Set a budget that includes savings and unforeseen expenses, and stick to that budget no matter what tempts you to overspend.
Another sign of financial literacy is how well you protect what you earn, what you own, and who you help support.
Consider purchasing the following types of insurance:
- Disability insurance, which replaces a portion of your income in the event you cannot work due to an injury or illness for an extended period.
- Critical illness insurance, which pays a lump sum benefit if you are diagnosed with a serious — and expensive to treat — illness such as a heart attack, stroke, or cancer. Critical illness insurance can pay for costs not covered by health insurance, such as deductibles and out-of-pocket costs. You can also use the funds for travel expenses and your regular bills.
- Life insurance, which pays a lump sum benefit to your designated beneficiaries when you die. Life insurance is designed to help replace your income to the people, such as your spouse and/or children, who depend on it.
Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.