What Is Financial Literacy and Why Is It Important?
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Approved and verified accurate by the financial planning lead of the Colangelo College of Business on Sept. 22, 2024.
The views and opinions expressed in this article are those of the author’s and do not necessarily reflect the official policy or position of Grand Canyon University. Any sources cited were accurate as of the publish date.
If someone asked you to define "financial literacy," how would you do it? A quick internet search would likely return plenty of definitions that make it seem like being financially literate is a fancy way to say having financial knowledge or an understanding of finances. Perhaps an inquiry to friends would provide examples about topics that one would need to know about, such as budgeting, saving or investing.
While these are a reasonable start, it is sort of like saying that being fluent in a language is simply having knowledge of how to spell some words or conjugate a verb on paper. You can probably see what is clearly missing — wouldn’t one need to be able to actually use the language and speak the language to be considered fluent? Being able to recite grammar rules is a start, but it is different from being able to use those rules in conversation.
Financial literacy requires not just being aware of the concept that it is not sustainable to spend more than you earn, but also taking action, such as by setting up a spending plan that you actively use to allocate money to future goals, track your spending, and make adjustments to keep things in balance.
Part of exploring the questions, What is financial literacy? and Why is financial literacy important? could be to also consider what financial literacy is not. It is not about becoming obsessed with money or becoming materialistic. It is also not about being miserly or avoiding spending money at all costs.
Instead, it is more about making good use of your resources to live a balanced life, enjoying the things you value both now and in the future. Just like becoming more proficient at a language requires continuous learning and active practice, with continued learning and active practice, your financial literacy can be enriched.
At GCU, you can improve your own financial literacy by enrolling in the personal finance course FIN-210, which explores various categories of personal finance topics. If you would like to pursue a career in which you help others with their financial planning, you may want to consider the BS in Finance with an Emphasis in Financial Planning.
This CFP Board Registered Program meets the education requirement needed to be able to register for the CFP® exam — an important step in the CFP® certification process,2 while introducing you to topics such as investments, insurance, estate planning, taxation and retirement. Or, you can improve your overall business and investing finance knowledge by enrolling in a BS in Finance degree.
If the first lessons of language learning include basics like vocabulary and simple grammar, what are the initial building blocks of financial literacy? It might be knowing the difference between a checking and a savings account, or knowledge about how interest rates affect your overall cost when taking out a loan or understanding the terms of a credit card agreement. As you progress, you might delve into more complex topics like investment choices for retirement plans, deciding between renting or buying a house, or determining what insurance coverage you need to protect your assets.
Alan Greenspan, a renowned economist and former chairman of the Federal Reserve, believed that the top problem in today’s generation and the economy is the lack of financial literacy.1 This highlights the importance of financial literacy and also prompts the question of what could be done to improve one’s financial literacy.
You could start by reading personal finance books, magazines or newsletters. Or, listen to a financial podcast or take a class. Always consider the source to ensure you're getting accurate, updated and unbiased information. Practice what you learn by creating a budget, setting savings goals and making informed and purposeful financial decisions.
Financial literacy is not only having knowledge about financial terminology or how to manage money but also using and implementing that knowledge. For example, it’s not only important to know that having an emergency fund is beneficial, but also to use that knowledge to take action by establishing a monthly contribution to a savings account.
While it is one thing to understand that impulse spending can stand in the way of achieving financial goals, it is another thing to actually behave in a way that avoids that unnecessary impulse buy.
When questioning, What is financial literacy? and pondering the various bits of knowledge that would be helpful for financial literacy, several categories come to mind:
Consider the continuum of language learning — you start with the basics, then move on to conversational proficiency and eventually reach fluency, where you can engage in meaningful conversations. Similarly, financial literacy is a journey. We all may be at different points on this continuum, and the goal is to advance by continuously learning and applying that knowledge to practical situations.
This journey involves practice. Just like with language, where mistakes are made along the way, such as misusing a term or using incorrect grammar, missteps will also happen as you practice your personal finance skills. By learning from those mistakes, you will be able to make better decisions in the future.
