Why Financial Literacy is Important

The importance of financial literacy goes beyond paying your bills. When you’re truly financially literate, you understand how to prepare for your future while also taking care of today’s finances. 

But if you don’t consider yourself financially literate, you aren’t alone. In fact, according to a recent survey by The Penny Hoarder, 32% of respondents either don’t consider themselves financially literate or don’t know what it means. Here’s what you need to know to improve your financial literacy.

The Importance of Financial Literacy 

Paying bills and saving for a rainy day are important, but some lack the skills to do so. Financial education isn’t a priority in schools, leaving it to parents to teach budgeting, bill paying, saving and retirement planning.

To determine how it’s going, we recently conducted a survey, aimed at gauging financial literacy levels among consumers. The survey found:

• Nearly 32% either don’t see themselves as financially literate or don’t know what the term means
• Only 40% know what the 50/30/20 rule applies to
• Only 22% have a rainy day fund at their desired level
• About 43% don’t budget at all

With so many respondents lacking financial literacy, it’s important to understand why it matters. Taylor Kovar, CFP, CEO at PhysicianFinancialPlanning.com, said financial literacy helps people make decisions about their money that improve their financial health and provide security.

“Understanding key concepts such as budgeting, saving, investing and managing debt helps people avoid common financial pitfalls, plan for the future and achieve their financial goals,” Kovar said. “Without financial literacy, individuals are more likely to face issues such as unmanageable debt, insufficient savings and inadequate retirement planning.”

How Does Financial Literacy Help You?

Financial literacy puts you in charge of your finances. By knowing what you need to do, you can create actionable steps that help you reach your goals. This, in turn, can help reduce the stress and anxiety that comes with money and help you sleep a little better at night.

But even with a full financial education, it can be tough to know where to start. That’s why Kovar recommends reaching out to a financial advisor for personalized guidance in addition to using reputable resources like books, online courses and financial blogs. We also recommend these financial podcasts and books. The professionals are a good starting point for more advanced financial topics like investing and retirement planning.

“Begin with simple steps, such as creating a budget, tracking expenses and understanding the importance of savings and investments,” Kovar advises.

How to Improve Your Financial Literacy

It’s never too late to boost your financial education. Here are some things you can do to improve your financial literacy.

Set a Budget — And Learn How to Stick to It

Getting a handle on your finances starts with keeping an eye on the funds coming in and out of your bank accounts. Patrick Marcinko, CFP®, a financial advisor at Bogart Wealth, says a budget is always a great idea. Get started with a budgeting app. Some of our favorites are Quicken Simplifi, Cleo and Empower. 

“Whether you track each individual expense or you review your budget once per month, it is empowering to have a sense for where your money goes each month,” Marcinko said. “At first, budgeting can feel overwhelming, but over time, the process gets easier.” 

This is also where that 50/30/20 rule comes in. It’s a popular budgeting method because of its simplicity. You put 50% of your money toward needs, 30% toward wants and put the remaining 20% in savings. 

If you don’t want to track every expense, Marcinko has another option. A popular strategy called reverse budgeting will let you monitor your finances without logging expenses throughout the day.

“Set a target to save each month and then spend the rest,” he explains. “The most important part of this is to hit your savings goal and not overspend what is left.”

Put Your Funds in the Best Place

It’s tough to set money aside when unexpected emergencies take a chunk out of every paycheck. By building at least a small emergency fund, you can tackle those emergencies as they occur without disrupting your budget. 

“An emergency fund is a vital part of anyone’s finances,” Marcinko said. “Life happens and unexpected expenses can pop up at a minute’s notice. Being prepared with savings set aside for a rainy day helps you stay on track with your financial goals.”

The importance of financial literacy comes in when you’re deciding where to put that money. Putting it in a high-yield savings account will help it grow without any extra effort from you.

Automate Your Savings

There’s no shortage of tech tools to help make financial management easier. Use those tools to automatically shuffle funds over to your savings account on a regular basis. You can likely direct your bank to move part of your paycheck over to savings. Over time, even small amounts can add up when they’re being deposited once or twice a month.

“Automating your savings is a great way to put wealth building on autopilot,” Marcinko advises. “Setting up 401(k) contributions through paycheck deductions is a common way to automatically save every couple weeks.”

Start Small

Tackling financial literacy doesn’t have to be overwhelming. Kovar has some suggestions to break it into more manageable chunks.

“If you find it challenging to allocate 20% of your income to savings, start small,” he said. Begin by setting aside a smaller percentage, even if it’s just 5% or 10%, and gradually increase it as your financial situation improves. Review your expenses to identify areas where you can cut back and redirect those savings. Consistent, incremental improvements can lead to significant progress over time.

Set Lifelong Habits

True financial literacy requires a lifestyle change, so it’s important to create sustainable habits. Kovar recommends regularly reviewing and updating your financial plan, especially when life circumstances change.

“Stay informed about financial trends and continuously seek to improve your knowledge,” he adds. “The more proactive you are about managing your finances, the better prepared you’ll be for achieving your financial goals and securing your future.”

It takes time to learn financial literacy and put it to work in your life. You don’t have to make the changes overnight. With some careful planning and evaluation of your habits, you can take control of your money management and get better results in the decades to come.

Stephanie Faris is a professional finance writer with more than a decade of experience. Her work has been featured on a variety of top finance sites, including Money Under 30, GoBankingRates, Retirable, Sapling and Sifter.