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Financial Literacy: Keep Your Money Tight and Right

Financial literacy is the ability to manage money in a way that encourages financial health. Mastery of budgeting, saving, debt, and investing make up financial literacy's key components, and these core topics should be part of any comprehensive education.

Financial literacy can be boiled down to one basic concept: Just save more money than you spend. Easy-peasy, right?

Yet, only 57% of Americans are financially literate, per the S&P Global FinLit Survey. And you can’t afford to be among the 43% that don’t make the grade. According to a study by the National Financial Educators Council (NFEC), lack of personal finance knowledge cost each American an average of $1,389.06 in 2021.

This isn’t due to incompetence, of course. Unfortunately, the term “financial literacy” comes with all kinds of condescension — as if those who don’t qualify are utterly clueless when it comes to cash. And there are plenty of stereotypes attached, like that financial literacy equals wealth. And vice versa.

But so-called “financial literacy” is dictated by numerous factors: from access to financial education and banking services in your community to generational wealth or financial trauma. And let’s get real: there’s a lot of jargon in the finance world that can make the savviest of us feel like we have no idea what we’re talking about when it comes to our own money.

All this to say, that even if you are among those dubbed “financially literate,” you probably know how to manage your money, but you probably also realize there’s a lot still for you to learn. So, how much do you really need to know? Let’s break down the basics with a bit of financial literacy 101.

What Is Financial Literacy?

Financial Literacy Definition

Financial literacy is the combination of knowledge, skill, and confidence needed to use money in sound and healthy ways.

Note that I didn’t include “access to money” in that list. That’s because having wealth doesn’t necessarily make you more financially literate, and not having money doesn’t make you less so. Traditionally, any talk of financial literacy has assumed you have a certain base level of money in the bank, but that’s simply not true.

Let’s keep it simple: If a stranger puts a dollar in your hand, do you know exactly what to do with it? If you do, then you can count yourself as financially literate. Which means, no, you don’t need to know what an ETF is or how to buy bitcoin. And even if you’re living paycheck to paycheck just to cover your food and rent, but you know how to make it work — that’s financial literacy.

After all, there’s a big difference between knowing what to do and being able to do it. And so, if some of these are out of reach for you right now, that doesn’t mean you’re financially illiterate.

Financial literacy means you can check off the following:

  1. You know to pay your bills on time because late fees are expensive, they hurt your credit score, and they just generally make you angry.
  2. You know to spend less than you earn.
  3. You understand how compounding interest on your savings/investments can set you up for retirement.
  4. You understand how compounding interest can be used against you through subprime loans.
  5. You’re allergic to overpaying for products or services.
  6. You’re just generally awesome at adulting, no matter your income.

Why Is Financial Literacy Important?

You might say I’m passionate about this topic. Full disclosure: I literally wrote a book about my own financial metamorphosis, called The Frugalista Files: How One Woman Got Out of Debt Without Giving Up the Fabulous Life.

Once upon a time, I too was among the financially unlettered. Sure, I had a decent job, and I knew how to pay my bills on time. But I had too many bills and too little savings.

I didn’t consider myself financially literate until I realized that the little decisions I made daily determined my financial future and, quite honestly, the course of my life.

The same applies to all of us. Either we figure out a plan for how to thrive or we won’t survive. Financial literacy is a non-negotiable.

Financial literacy doesn’t mean your finances are perfect. However, it allows you to at least manage the imperfect parts.

Basics of Financial Literacy

While the fundamental ‘save more than you spend’ essence of financial literacy seems simple enough, there are some foundational skills and concepts that you need to master in order to truly pull it off alongside a toolkit of the best personal finance products.


“A budget is a plan you write down to decide how you will spend your money each month,” according to, a site by the Federal Trade Commission.

Understanding your personal cash flow is an essential component of financial literacy. Every dollar that you earn should be accounted for so that you don’t end up wasting money on things that you don’t need. Budgets help you to control and organize your spending and provide a framework for your income.

A good budget covers housing expenses, food, debt repayments, savings, and yes, discretionary spending. We are social creatures, and we need fun.

Some people think of budgets as restrictive, but they don’t have to be. Instead, treat your budget as the financial roadmap that you need to travel through life. You wouldn’t take a road trip without directions, would you? Don’t move through life without knowing exactly where your money is going.

Saving and Emergency Funds

Sometimes “life happens.” An emergency fund is a stash of savings reserved for when something goes awry.

Think of that time you got hit with a surprise tax bill. Or when you were freelancing and your main client unexpectedly shut down their business. Your emergency fund should be enough of a cushion to keep you financially stable when you face these unexpected expenses or periods of low income.

How much is enough? Play around with an emergency fund calculator for a ballpark figure of what you need to save given: A. Your approximate monthly expenses; B. Your existing savings; and C. The estimated time it would take for you to replace your usual income if it’s cut off.

If you’re at the beginning of your savings journey and the amount you have left to save for a fully-stocked emergency fund is overwhelming, take a deep breath. Start small by saving $1,000 or, if you have $1,000, putting it into an account you only touch for true, must-handle crises, and then gradually grow the fund month by month.

FYI, new video games or the latest Yeezy drop don’t count as emergencies, cool? Acknowledging that simple fact already makes you more financially literate than many of your peers!


Debt is money you owe to someone else. It’s typically subject to compounding interest, i.e., a sum of money you must pay to the lender in addition to the amount of money you’ve borrowed. The lower the interest rate on the debt, the less the borrower will pay overall. The higher the interest rate, the more money the lender stands to make.

In some cases, taking on a sustainable amount of low-interest debt can be a financially literate move. You might need to borrow money to pay for an essential expense that facilitates your career goals, like a car or a college education. Or you might borrow money to pay for a large asset that will appreciate in value, like a home.

However, using debt to pay for daily expenses on a credit card, and then carrying an unpaid card balance from one month to the next, can lead to a ruinous, unending cycle of debt.

Financially literate people know when to acquire debt and when to shun it. They work diligently to pay off their debts because they understand that high balances can hurt their credit scores and their ability to save.


Investing is buying an asset in anticipation that it will increase in value and provide financial returns. It’s how you put your money to work for you and achieve wealth.

Conversely, an asset you purchase can also decrease in value, so there’s always a degree of risk involved. But some investments are less risky than others. Bonds can be a relatively low-risk investment, whereas buying crypto is highly speculative.

Financially literate people recognize the importance of investing and aim to have part of their discretionary income tied up in investments.

They also diversify their investment profiles and only invest money that they can afford to potentially lose. They do their research before spending one dollar on an investment. They know their risk tolerance and allocate assets appropriately.

How to Improve Financial Literacy

Improving your financial literacy is like anything else that you want to master — you need to work at it every day. When I wanted to become smarter with my money, I started reading reputable personal finance blogs, news articles, Twitter feeds, and books. Financial podcasts can be a great source of knowledge as well. No two people have the same finances, so you need to consume lots of different material to figure out what works best for your situation.

Focus on money management — budgeting, saving/building an emergency fund, and repaying debt — at the beginning of your financial literacy journey. When you’re comfortable with those elements, start to devote more time to building your investment plan. There are a lot of scammers in the financial world, so avoid any get-rich-quick schemes like the plague. If it sounds too good to be true, it is.

As you become more sophisticated and confident in your financial knowledge, you might pair up with a fee-only certified personal financial advisor to help you navigate the investing world. And even when using a financial advisor, you still have to keep abreast of how your portfolio is performing. The more you work at financial literacy, the luckier you become.

Read more: Should I Get a Financial Advisor?

Financial Literacy Quiz

One of the best steps you can take toward improving your financial literacy is to test your knowledge. You don’t know what you don’t know, but a test will certainly show where you need to tighten up on the money front!

Should Financial Literacy Be Taught in Schools?

Educators might understandably resist the notion of adding a separate financial literacy class to already-packed school days. But financial literacy is clearly a must-have skill for everyone, and we’d be hamstringing our youth by excluding it from their education.

Here’s an idea: Instead of a dedicated financial literacy class, why not incorporate short financial literacy lessons into existing classes, at all ages, starting from first grade?

Kids can play around with the fundamentals of budgeting as soon as they learn to add and subtract.

When older students learn about supply and demand in their economics course, it’s typically taught to them as a matter of commodities and products. Why not relate the concept to human resources and an individual’s professional market value?

I remember talking to a group of bright high school students who balked at the idea that a prepaid debit card sponsored by a popular celebrity wasn’t a good financial move. To these kids, prepaid debit cards were financial saviors. After all, their celebrity hero told them so. 

What if their English class had emphasized that the wizard in the Wizard of Oz was just marketing and no substance? And that self-professed miracle workers — and the products they shill — might not bear close inspection?

Had they been properly armed with critical thinking skills, the students I met might have dug a little deeper into the realities of prepaid debit cards before they signed up for them. They likely would have discovered that prepaid cards typically cost too much money to maintain over time and do absolutely zilch for credit scores.

Final Thoughts

I wish I could sincerely tell you that personal finance is as easy as spending less than you make, but it’s of course a tad more complex than that. Our lives and our finances are too fluid to be governed by hard-and-fast rules.

Yes, you always want to increase your savings. Yes, you always want to repay debt. But there are exceptions to every ‘always.’

For instance, you shouldn’t save money at the expense of getting necessary health care procedures to save your life. Nor should you spend all your savings on paying off your student loan debt and then be forced to run up a high-rate credit card to pay for life’s emergencies.

These kinds of financial dilemmas pop up for everyone, and they’re too numerous to cover in this article. But that’s where the literacy part of financial literacy comes into play. Literacy of your own financial status and aspirations will guide you through the day-to-day choices that take up the bulk of your financial brainpower. Turning to the wealth of personal finance resources you have at your fingertips will help you with the less intuitive decisions that pop up along the way.

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