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Michael Santiago, CRPC™
Senior Financial Editor
Michael Santiago is a skilled writer and editor with over a decade of experience in various industries. As a senior financial editor, he collaborates with a team of experts to develop compelling and accurate content.
Lamia Chowdhury
Senior Financial Editor
Lamia Chowdhury is an experienced financial writer and content strategist specializing in insurance, retirement planning and personal finance. She combines editorial precision with a deep understanding of financial topics to create clear, accurate and engaging content that empowers readers to make confident financial decisions.
Rubina K. Hossain, CFP®
Client Advisor for MEIRA
Certified Financial Planner Rubina K. Hossain is chair of the CFP Board’s Council of Examinations and past president of the Financial Planning Association. She specializes in preparing and presenting sound holistic financial plans to ensure her clients achieve their goals.
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Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.
Michael Santiago, CRPC™
Senior Financial Editor
Michael Santiago is a skilled writer and editor with over a decade of experience in various industries. As a senior financial editor, he collaborates with a team of experts to develop compelling and accurate content.
Lamia Chowdhury
Senior Financial Editor
Lamia Chowdhury is an experienced financial writer and content strategist specializing in insurance, retirement planning and personal finance. She combines editorial precision with a deep understanding of financial topics to create clear, accurate and engaging content that empowers readers to make confident financial decisions.
Rubina K. Hossain, CFP®
Client Advisor for MEIRA
Certified Financial Planner Rubina K. Hossain is chair of the CFP Board’s Council of Examinations and past president of the Financial Planning Association. She specializes in preparing and presenting sound holistic financial plans to ensure her clients achieve their goals.
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Key Takeaways
Financial literacy is the ability to understand the use of money as it applies to your personal finances, according to the National Financial Educators Council.
It can help you make better decisions and is a key element in improving your behavior and planning when it comes to your personal finances and overall financial wellness.
Financial literacy skills include an ability to find, understand and use resources and information to help you make informed decisions about your personal finances, according to the American Institutes for Research.
Having these skills can provide the confidence, knowledge and ability to make solid financial decisions. Financial literacy skills promote financial self-sufficiency, stability and well-being.
Financial literacy is important because it empowers you to make informed and responsible financial decisions. It helps you understand concepts like budgeting, saving, investing and debt management.
It allows you to make better decisions through problem-solving, critical thinking and having a grasp of essential facts and concepts related to basic personal finance.
Building your financial literacy helps you create a secure future, avoid financial pitfalls and achieve your financial goals.
There are five principles of financial literacy:
These principles of financial literacy serve as a road map for good money management and are the establishment of a solid financial foundation. Learning about them — and putting them into practice — can improve your financial situation now and in the future.
Your income is the foundation of your personal finances. It is the basis for your lifestyle and your financial future.
Implementing the Principle
Creating a budget will help you put aside money for savings and investments. This allows you to grow your wealth and can empower you to make major financial plans such as buying a house or paying for retirement.
Implementing the Principle
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Borrowing wisely will allow you to make major purchases while building your credit. This can help you pay for a home, car or a college education. But avoid excessive debt that can eat into your ability to save and invest in the future.
Implementing the Principle
When you get your paycheck, consider following the 50-30-20 budget or the 80-20 strategy.
Following the 50-30-20 budget means putting 50% of it toward needs, 30% toward wants and the remaining 20% toward savings and investments. This is one of several personal finance strategies that can help you keep your spending on track.
With the 80-20 budget, you “pay yourself first” by setting aside 20% for savings, then using the remaining 80% for both fixed and variable expenses.
Implementing the Principle
You will need to protect your financial assets: savings, investments and your budget. This can take the form of an emergency fund and insurance.
Implementing the Principle
To set financial goals, start by distinguishing between short-term and long-term objectives. Short-term goals focus on immediate needs or desires. Long-term goals encompass longer-term milestones like retirement or buying a house.
Determine how much money you need to achieve each goal. You’ll need to consider factors like inflation and time horizons — the amount of time left before your goal. You can break down the goals into smaller milestones and create a timeline for accomplishment.
You can use tools like spreadsheets for budgeting apps to track your progress. And you should regularly reassess and adjust your goals as circumstances change.
Celebrating milestones along the way will help you stay motivated.
A budget is a plan for spending your money each month. Creating a budget will help make sure you don’t run out of money before the month is up. You can also use it to save money to pay for long-term goals.
Begin creating your budget by making a list of your monthly expenses.
Expenses can include:
Now, figure out your income. Write down how much money you make every month. Include all forms of money, like paychecks, tips, side jobs or child support.
Finally, subtract your expenses from your total income. If the number is less than zero, you are spending more than you make. You’ll need to look for places to cut back your expenses or find a way to make more money.
If you get a number greater than zero, this is money you can budget each month toward savings or some other financial goal
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You can use your budget to make a plan at the beginning of each month on how you will spend the money you earn.
Keep track of your spending by writing down everything you spent each day — or keep track using an app. At the end of the month, you can see where your money went.
This can help you adjust your spending. You may discover expenses that you can cut back on — or eliminate.
Use this knowledge to adjust your next month’s budget. If you do this every month, you’ll eventually fine tune your spending and saving to make it more manageable and efficient. And it can help you start saving more.
To create savings, start by setting up a dedicated savings account. Making a separate account will help you separate your savings from your everyday expenses.
Next, make regular deposits into this account, whether it’s weekly, monthly or based on your paycheck. Consistency is key.
Automating your savings deposits can keep your deposits consistent. Direct deposits from your job mean you won’t notice a portion of your income going into savings. Automated deposits can keep you from skipping one. You also won’t forget to make a deposit.
By following these simple steps, you will build up your savings over time.
When you invest your money, it’s essential to have a clear financial goal in mind. Most people invest for retirement, but others invest for specific purposes like buying a home or paying for their children’s education.
Starting with employer-sponsored retirement plans, such as 401(k)s, can be a great way to begin investing, especially if your employer matches your contributions. By consistently putting money into these plans, you can build significant savings over time.
Different investment options, such as stocks, bonds and mutual funds, come with different benefits and risks. It’s essential to know the level of risk you’re comfortable with and balance that against your financial goals. This balance varies from person to person, so understanding your risk tolerance is crucial.
Finally, the amount you should invest depends on your unique financial situation and goals. It’s never too late to start investing, but the earlier you begin, the more time your investment portfolio has to grow.
Insurance is important to protect your assets because it provides financial security in case of unexpected events, such as accidents, natural disasters or lawsuits, minimizing the financial impact and helping safeguard your hard-earned assets.
Types of Insurance for Protecting Your Assets
The most important reason for purchasing life insurance is to provide financial protection to named beneficiaries in the event of the policyholder’s death.
You can also develop life insurance strategies to help achieve various financial goals, such as saving for education, retirement, optimizing estate plans and supporting business succession plans.
Disability insurance is important because it protects your income in case you become disabled and can no longer work.
It covers common but disabling injuries and illnesses that can prevent you from working for extended periods of time, such as cancer or severe bodily injury. It can also provide an income source while you are unable to work.
It is especially beneficial for sole providers or parents who need to support their families. People with recurring injuries or those in physically demanding jobs should also consider disability insurance.
Health insurance protects you against financial risks from high medical costs. It covers the most essential medical benefits necessary to keep you healthy. And it helps you pay for treatment of injuries and illnesses.
It also covers preventive care, which can detect a serious condition early. This can lead to early and less complicated treatment. Health insurance is often provided by employers in the United States. But you can also purchase health insurance on your own.
Homeowners and renters insurance protect your belongings if they are lost, damaged or destroyed through theft, accident or acts of nature. Both can also protect you financially if someone is injured in your home or apartment.
In the case of homeowners insurance, your whole home may be insured against loss or damage.
Financial literacy can help you guard against some of the most common financial mistakes people make. These include problems with credit card and student loan debt and predatory lending.
The most common financial mistakes with credit card debt include overspending, making only minimum payments and carrying high-interest balances.
To avoid the credit card debt trap, stay on budget and only charge what you can pay off each month to avoid interest and build your credit score. It’s also wise to set up automated payments so you don’t miss any, adding unnecessary interest and penalties to your bill.
Making more than minimum payments each month can help to pay off your debt faster.
With student loan debt, common mistakes include borrowing more than necessary and not understanding repayment options.
Tips for Avoiding Student Loan Debt
Even before applying to college, student financial literacy should be a critical part of a young person’s education.
Predatory lending mistakes involve falling for high-interest loans and deceptive lending practices.
To avoid becoming a victim, do your research and compare loans from several lenders. It’s best to avoid high-interest loans, particularly those at interest rates that grow faster than you can repay them. Don’t sign any loan agreements without understanding everything required for repayment.
Be cautious of phone calls, door-to-door or mail solicitation offering loans. These are often a sign of predatory lending.
Low financial literacy rates among women significantly impact their lives, leading to increased effort, longer debt repayment and lower earnings.
According to findings from The American College of Financial Services, 83% of women could not pass a retirement income literacy quiz compared to 65% of men.
Women also face obstacles due to the wage gap, housing market disparities, divorce-related financial consequences and inadequate retirement planning. But resources like the Women’s Institute for Financial Education, WISER and FLOW provide assistance and guidance for financial empowerment.
The racial gap in financial literacy is significant in the black community, with African Americans scoring substantially lower than white Americans.
Members of the black community in the U.S. answered only 37% of questions on a personal finance survey correctly compared to 55% of white Americans, according to a study by the TIAA Institute and the Global Financial Literacy Excellence Center.
African Americans struggle the most with insurance and risk comprehension, while debt management is their strongest area.
Financial literacy in the Latinx community lags well behind white Americans. But it is crucial for the U.S. Latinx community, whose members face economic disadvantages and a significant wealth gap compared to white Americans.
Financial literacy rates for the Latinx community were 38% on the 2022 TIAA Personal Finance Index, compared to 50% for all adults on average and 55% for white Americans.
Limited access to education, low wages and fewer benefits contribute to the wealth disparity. Better understanding financial literacy and utilizing available resources can help improve individuals’ financial situations.
LGBTQ+ workers earn 10% less than the average wages in the U.S., according to a 2021 survey from the Human Rights Campaign.
More than 44% of the LGBTQ+ community report they struggle to maintain adequate savings. That’s six points higher than the general population, according to a 2023 study. Among younger members of the community. Nearly half of those aged 25 to 34 said they had poor spending habits they wanted to improve or change.
There are free financial literacy resources tailored to LGBTQ+ individuals such as Healthy Rich and The Debt Free Guys, with a companion podcast called Queer Money.
People with disabilities scored lower than the national average on a measure of financial literacy, according to a study by the National Disability Institute and FINRA.
The study found that people with disabilities:
The National Disability Institute provides financial empowerment resources specifically tailored to people with disabilities. These include financial education, capability and financial wellness resources.
Financial literacy among older Americans is a mixed picture.
The share of the population that can answer basic financial literacy questions increases with age. But it drops off sharply at age 75 and older, according to a report by the U.S. Senate Special Committee on Aging.
Common issues with financial literacy among older adults include a lack of knowledge about retirement planning, health care costs and scams. Greater financial literacy knowledge can also help address the financial abuse of older adults.
Financial literacy for veterans and service members is a significant problem, according to a report by the U.S. Federal Reserve.
More than a third of service members reported difficulties in paying their bills and only half had an emergency fund, according to a joint study by the U.S. Treasury Department and the President’s Commission on Financial Literacy.
Transitioning out of the military leaves many veterans scrambling to adjust to civilian life, civilian health coverage and creating a post-military budget.
New immigrants and first-generation Americans face obstacles in financial literacy due to language and cultural differences. These challenges affect banking, credit, taxes and Social Security.
Of the more than 44 million immigrants living in the U.S., about 14.8 million had family income below 200% of the federal poverty level, according to a 2022 study by the Migration Policy Institute.
“Although low-income immigrants are a minority of all immigrants, they are of particular interest to policymakers and service providers seeking to support individuals and families who may need tailored assistance to get on a path to upward economic mobility,” the study authors wrote.
Support is available through financial advisors specializing in immigrant needs and organizations like Immigrant Finance and the International Rescue Committee. Community groups such as CASA and Immigrants Rising also offer assistance.
The best resources for learning about financial literacy include financial experts. Look for reputable websites, online courses and books by financial experts. Financial institutions, public media and community organizations also offer educational videos and workshops.
These sources provide information and resources to build financial knowledge and decision-making skills.
These are some key terms you should know when researching or studying financial literacy. You can find more terms in the Annuity.org Glossary of Financial Terms.
Source: U.S. Consumer Financial Protection Bureau
The five principles of financial literacy are knowing how to budget, save and invest your money, manage your debt, plan for your financial future and protect your assets through risk management. You can achieve these by building your financial knowledge, skills and behavior — and by setting realistic financial goals.
To improve your financial literacy, find ways to educate yourself about personal finance. Read about money matters in magazines, newspapers and personal finance books. Learn to use financial management tools through your online banking account or phone apps and talk with financial advisors, teachers, professors or others about what to study and where to turn for help.
Setting financial goals gives you a clear roadmap for your financial journey. It allows you to prioritize aspects of your personal finances while making informed decisions. Goals give purpose and enable you to build wealth, reduce debt and build a secure future.
If you are living within your means, you are covering all your expenses with just your income — and not going into debt. To live within your means, maintain a balanced budget, avoid excessive debt and put your needs over your wants. By living within your means, you can avoid financial stress, build savings and achieve long-term financial security.
Having an emergency fund provides a financial cushion during unexpected situations. It creates a safety net to cover unforeseen medical bills, car repairs or job loss. An emergency fund reduces stress and prevents the need for high-interest loans or going into debt.
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