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is Financial Literacy? //


DISCLAIMER. The information on this website is not intended or meant to be used as professional financial advice. Instead, the information, content and materials on this site are intended for general informational purposes only. Before making any financial decisions, readers of this website should consult a professional advisor.

Financial literacy refers to the ability to understand financial concepts and make informed money decisions. These concepts include budgeting, saving, and investing for both short-term and long-term goals.

Financial literacy can take many forms. This could include saving for retirement, planning to purchase a house, keeping on top of your credit card payments, and investing in college funds.

Financial literacy helps people better manage their money and keeps them ready for unexpected events.

Americans can improve their financial literacy. The National Financial Educators Council‘s 2021 National Financial Literacy Test measured the earning and investing abilities of more than 70,000 participants from 50 US states. Only 67.5% was the average American score.

Financial literacy can be improved by using free resources such as books, magazines and blogs. A meeting with a financial coach can provide one-on-one guidance.

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Why is Financial Literacy so Low?

Over the years, financial management has become more complex and harder to understand. This leaves the public unprepared and confused.

Financial knowledge is a common factor that equalizes income levels. The wealthy and educated are also susceptible to financial illiteracy. Financial advisors are often used by those with assets to manage.

Financial advisors are more focused on investment strategies. However, financial coaches help clients set financial goals and keep them on track.

There are fewer educational resources

According to a report from the National Financial Educators Council (NFEC), teaching personal finance in school or college would benefit 100%, while only 19% of students need high-school algebra in daily life.

Access to financial skills is often denied to members of minority groups.

Personal finance is not part of the general education curriculum, so more students end up being financially inept adults.

There is a racial disparity in financial literacy. Hispanic, Black and Indigenous American groups have a much lower rate of financial literacy than Asian and white demographics. Access to financial skills is often denied to members of minorities. This is in addition to trying to overcome historical injustices which make it difficult to maintain stable finances.

Additional Financial Products

Newer financial instruments are constantly being introduced to the market, including credit cards, stocks and bonds, and cryptocurrency. This leaves a lot of people confused and vulnerable to financial fraud.

Some financial products can improve quality of life while others can cause confusion. Complexity of products such as taxes, mortgages, and retirement funds can make it difficult for consumers to feel lost and stressed.

Complex Retirement Planning

In the past, retirement funds were completely managed by either the employer or the government through Social Security and pensions. Consumers today expect to be able to learn about complex retirement savings options, asset allocation, diversification and other topics.

Individuals are given the task of creating their own retirement plan. A CNBC report shows that 63% of Americans don’t know much about 401 (k) plans, which are the most popular employer-sponsored retirement funds in the country.

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The Key Concepts to Managing Your Financials

These are the core elements that will help you increase financial literacy. These concepts can be further explored in the links below.

Credit

It can be difficult to understand the difference between a credit and debit card. A debit card is used to make a payment. The amount is taken directly from your checking account. However, if you use a credit or debit card to make a payment, the funds are drawn directly from your checking account and you will be required to pay the bill later.

Credit scores and creditworthiness are affected by how much debt you have.

It is much more difficult to apply for a creditcard than a debit card from your bank.

The issuer will assess your income and history of timely payments when you apply for credit cards. This will determine if you’re eligible for the card. A secured credit card is an option if you’re applying for credit for your first time. This requires that you make a deposit to open the account.

Higher levels of debt will result in lower credit scores and creditworthiness. Low creditworthiness can have a negative impact on your financial decisions and other areas of your life such as employment or property purchases.

Credit cards are used to pay for basic expenses. Credit cards can lead to substantial debt. Nearly half of adult Americans have credit card debt, with some owing more than 10,000.

Interest

Higher interest rates can make your debt more expensive if you have credit or owe money in some form. Interest is not limited to credit. Interest accrues over time, regardless of whether you take out a mortgage or a student loan. You will pay a lot more than what you borrowed initially because of this interest.

High interest rates can be a positive thing for savings accounts. Higher interest rates can help your money grow more quickly if you’re saving money.

Investing

While savings provide security, smart investments can grow over time. Savings have a lower return and are more risky than investing. Investing promises higher returns, but with greater risk.

A high-yield savings account, or a certificate to deposit, could be a good first step towards investing. There is almost no risk of losing your money. Because it grows your money, a retirement fund can be considered an investment type. The best investment choice depends on your income, age, risk tolerance, financial goals, and other factors.

Budgeting

Budgeting is the core element of financial literacy. Budgeting is the process of taking money that you have earned over a period of time and creating a plan to use it for your needs, wants, or debt repayment.

Budgeting involves allocating money to basic expenses, bills, investment, savings, emergencies, and discretionary costs. There is no one right way to budget, but keeping track of the money coming in and going out is a good place to start. You should have a smaller budget if you have more expenses than income.

Budgeting beginners can use personal financial software, which is provided by banks and credit cards companies, as well as budgeting apps that will guide them.

When creating a budget ask yourself whether you are aware your monthly expenses, have an emergency fund, and what your financial goals for the next six-months.

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How to become more financially literate

Although money can seem overwhelming and complicated, it is possible to increase your financial literacy by choosing small steps and using the right resources. Log in to your bank account and see if you have a tracker that tracks your spending habits.

Check with your employer to find out if your employer offers free financial counseling. Numerous non-profit organizations and agencies offer financial education at no cost to consumers. These are some of the most popular organizations:



  • Consumer Financial Protection Bureau



    :

    This federal agency provides resources and guides that are free to all financial subjects, including how to get a loan or save for college.


  • Federal Reserve Education



    :

    Federal Reserve provides financial resources free of charge to K-12 students as well as adults. This is to encourage learners to learn financial literacy and financial responsibility.


  • National Foundation for Credit Counseling



    :

    The NFCC is one of the oldest and largest financial counseling organizations. It has member agencies and certified counselors who offer financial coaching to individuals and small businesses. They also help with retirement planning and guide people towards a financial life that is healthy and happy. Financial planning calculators are available as a free resource.

    Military veteran programs

    You can also learn more about debt management.


  • Jump$tart Coalition



    :

    Jump$tart Coalition for Personal Financial Literacy, a non-profit organization, is made up of more than 100 national organizations that are committed to financial literacy for youth. It offers free financial education resources to students and parents alike.


What does Accounting Financial Literacy mean?

Students and professionals need to have a deep understanding of complex financial concepts in order to pursue a career as an accountant. The most commonly used accounting concepts are bookkeeping money measurement, business entity and accounting period. generally accepted Accounting Principles (GAAP) also covers appreciation and depreciation.

Advanced certifications, such as chartered accountant , or certified financial advisor , require extensive study of complex concepts like investments, estate planning, professional conduct, and regulations.



Featured image: AndreyPopov/ iStock/ Getty Images Plus

Accounting.com first published the post Financial Literacy.

Justin Young
Author: Justin Young

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