Financial Literacy: What It Is, and Why It Is So Important

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What Is Financial Literacy?

Understanding financial literacy.

  • Why It Matters

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importance of financial literacy essay

Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting , and investing . When you are financially literate, you have the essential foundation of an intelligent relationship with money, and it will serve you as a starting point to a lifelong journey of learning about financial matters that are more advanced. The earlier you start, the better off you will be financially, because education is the key to success when it comes to money.

Key Takeaways

  • The term “financial literacy” refers to a variety of important financial skills and concepts.
  • People who are financially literate are generally less vulnerable to financial fraud.
  • A strong foundation of financial literacy can help support various life goals, such as saving for education or retirement, using debt responsibly, and running a business.
  • Key aspects to financial literacy include knowing how to create a budget, plan for retirement, manage debt, and track personal spending.
  • Financial literacy can be obtained through reading books, listening to podcasts, subscribing to financial content, or talking to a financial professional.

Investopedia / Paige McLaughlin

From about 2000 to 2022, financial products and services have become increasingly widespread throughout society. Whereas earlier generations of U.S. residents may have purchased goods primarily in cash, various credit products are popular today, such as credit and debit cards and electronic transfers. A 2021 survey by the Federal Reserve Bank of San Francisco revealed that 28% of all payments were via credit card, with only 20% being made in cash.

Given the importance of finance in modern society, lacking financial literacy can be very damaging to an individual’s long-term financial success. Even so, research shows that financial illiteracy is very common, with the Financial Industry Regulatory Authority (FINRA) attributing it to 66% of Americans.

Being financially illiterate can lead to a number of pitfalls, such as being more likely to accumulate unsustainable debt burdens, either through poor spending decisions or a lack of long-term preparation. This, in turn, can lead to poor credit , bankruptcy , housing foreclosure , and other negative consequences.

Thankfully, there are now more resources than ever for those wishing to educate themselves about the world of finance . One such example is the U.S. government-sponsored Financial Literacy and Education Commission, which offers a range of free learning resources.

Financial literacy can help protect individuals from becoming victims of financial fraud, a type of crime that is becoming more commonplace.

Scope of Financial Literacy

Although many skills might fall under the umbrella of financial literacy, popular examples include household budgeting, learning how to manage and pay off debts , and evaluating the tradeoffs between different credit and investment products. These skills often require at least a working knowledge of key financial concepts, such as compound interest and the time value of money .

Other products, such as mortgages , student loans , health insurance , and self-directed investment accounts , have also grown in importance. This has made it even more imperative for individuals to understand how to use them responsibly.

Financial literacy can cover short-term financial strategy as well as long-term financial strategy, and which strategy you take will depend on several factors, such as your age,  time horizon , and  risk tolerance . Financial literacy encompasses knowing how investment decisions made today will impact your tax liabilities in the future.

This also includes knowing which investment vehicles are best to use when saving, whether for a financial goal like buying a home or for retirement. This is not to add the novelties in finance such as e-wallets, digital money, buy now/pay later, P2P lending, and other new financial products that can be convenient and cost-effective but require potential consumers to be educated to assess them adequately to their advantage.

Why Financial Literacy Matters

From day-to-day expenses to long-term budget forecasting, financial literacy is crucial for managing these factors. It is important to plan and save enough to provide adequate income in retirement while avoiding high levels of debt that might result in bankruptcy,  defaults , and foreclosures.

If you are a younger individual, retirement may seem years away. While it is a ways in the future, it is also one of the best goals to start saving for, because the earlier you start, the more you’ll have compounded down the line. One investment vehicle to start with is an employer-sponsored retirement account, such as a 401(k) .

In its Economic Well-Being of U.S. Households in 2020 report, the U.S.  Federal Reserve System  Board of Governors found that many Americans are unprepared for retirement. More than one-fourth indicated that they have no retirement savings, and fewer than four in 10 of those not yet retired felt that their retirement savings are on track. Among those who have self-directed retirement savings, more than 60% admitted to feeling low levels of confidence in making retirement decisions.

Low financial literacy has left millennials—the largest share of the American workforce—unprepared for a severe financial crisis, according to research by the TIAA Institute. Even among those who report having a high  knowledge of personal finance , only 19% answered questions about fundamental financial concepts correctly. Forty-three percent report using expensive alternative financial services, such as  payday loans  and pawnshops. More than half lack an  emergency fund  to cover three months’ expenses, and 37% are financially fragile (defined as unable or unlikely to be able to come up with $2,000 within a month in the event of an emergency).

Millennials also carry large amounts of student loan and mortgage debt—in fact, 44% of them say they have too much debt.

Though these may seem like individual problems, they have a wider effect on the entire population than previously believed. All one needs is to look at the  financial crisis of 2008  to see the financial impact on the entire economy that arose from a lack of understanding of mortgage products (creating a vulnerability to  predatory lending ). Financial literacy is an issue with broad implications for economic health.

Benefits of Financial Literacy

Holistically, the benefit of financial literacy is to empower individuals to make smarter decisions. More specifically, financial literacy is important for a number of reasons.

  • Financial literacy can prevent devastating mistakes : Floating rate loans may have different interest rates each month, while traditional individual retirement account (IRA) contributions can’t be withdrawn until retirement. Seemingly innocent financial decisions may have long-term implications that cost individuals money or impact life plans. Financial literacy helps individuals avoid making mistakes with their personal finances.
  • Financial literacy prepares people for emergencies : Financial literacy topics such as saving or emergency preparedness get individuals ready for the uncertain. Though losing a job or having a major unexpected expense are always financially impactful, an individual can cushion the blow by implementing their financial literacy in advance by being ready for emergencies.
  • Financial literacy can help individuals reach their goals : By better understanding how to budget and save money, individuals can create plans that set expectations, hold them accountable to their finances, and set a course for achieving seemingly unachievable goals. Though someone may not be able to afford a dream today, they can always make a plan to better increase their odds of making it happen.
  • Financial literacy invokes confidence : Imagine making a life-changing decision without all the information you need to make the best decision. By being armed with the appropriate knowledge about finances, individuals can approach major life choices with greater confidence realizing that they are less likely to be surprised or negatively impacted by unforeseen outcomes.

Strategies to Improve Financial Literacy Skills

Developing financial literacy to improve your personal finances involves learning and practicing a variety of skills related to budgeting, managing, and paying off debts , and understanding credit and investment products. The good news is that, no matter where you are in life and financially, it’s never too late to start practicing good financial habits.

Here are several practical strategies to consider.

Create a Budget

Track how much money you receive each month against how much you spend on an Excel sheet, on paper, or with a budgeting app . Your budget should include income (paychecks, investments, alimony), fixed expenses (rent/mortgage payments, utilities, loan payments), discretionary spending (nonessentials such as eating out, shopping, and travel), and savings.

Pay Yourself First

To build savings, this reverse budgeting strategy involves choosing a savings goal, such as paying for higher education, deciding how much you want to contribute toward it each month, and setting that amount aside before you divvy up the rest of your expenses.

Pay Bills Promptly

Stay on top of monthly bills, making sure that payments consistently arrive on time. Consider taking advantage of automatic debits from a checking account or bill-pay apps and sign up for payment reminders (by email, phone, or text).

Get Your Credit Report

Once a year, consumers can request a free credit report from the three major credit bureaus —Equifax, Experian, and TransUnion—through the federally created website AnnualCreditReport.com. Review these reports and dispute any errors by informing the credit bureau of inaccuracies. Because you can get three of them, consider spacing out your requests throughout the year to monitor yourself regularly.

In a 2021 survey by the Federal Reserve, 22% of adults in the United States reported not being OK financially and not living comfortably financially.

Check Your Credit Score

Having a good credit score helps you obtain the best interest rates on loans and credit cards, among other benefits. Monitor your score via a free credit monitoring service (or, if you can afford to and want to add an extra layer of protection for your information, use one of the best credit monitoring services ). In addition, be aware of the financial decisions that can raise or lower your scores , such as credit inquiries and credit utilization ratios .

Manage Debt

Use your budget to stay on top of debt by reducing spending and increasing repayment. Develop a debt reduction plan , such as paying down the loan with the highest interest rate first. If your debt is excessive, contact lenders to renegotiate repayment , consolidate loans , or find a debt counseling program.

Invest in Your Future

If your employer offers a 401(k) retirement savings account, be sure to sign up and contribute the maximum to receive the employer match . Consider opening an individual retirement account (IRA) and creating a diversified investment portfolio of stocks, fixed income, and commodities. If necessary, seek financial advice from professional advisors to help you determine how much money you will need to retire comfortably and develop strategies to reach your goal.

Example of Financial Literacy

Emma is a high school teacher who tries to inform her students about financial literacy through her curriculum. She educates them on the basics of a variety of financial topics, such as personal budgeting, debt management, education and retirement saving, insurance, investing, and even tax planning. Emma’s students can and will use these concepts later in life for things like renting an apartment, getting a first job, or even just paying for fun activities such as going to the movies.

Understanding concepts such as interest rates , opportunity costs , debt management , compound interest, and budgeting, for example, could help her students manage the student loans that they might rely on to fund their college education and keep them from amassing dangerous levels of debt and endangering their credit scores. Similarly, she expects that certain topics, such as income taxes and retirement planning, will eventually prove useful to all students, no matter what they end up doing after high school.

Why Is Financial Literacy Important?

Being financially literate from a young age gives an individual the tools and resources they need to be financially secure later in life. The lack of financial literacy can lead to a number of pitfalls, such as accumulating unsustainable debt burdens, either through poor spending decisions or a lack of long-term preparation. This, in turn, can lead to poor credit, bankruptcy, housing foreclosure, or other negative consequences.

How Do I Become Financially Literate?

Becoming financially literate involves learning and practicing a variety of skills related to budgeting, managing and paying off debts, and understanding credit and investment products. Basic steps to improve your personal finances include creating a budget, keeping track of expenses, being diligent about timely payments, being prudent about saving money, periodically checking your credit report, and investing for your future.

What Are Some Popular Personal Budget Rules?

Two commonly used personal budgeting methods are the 50/20/30 and 70/20/10 rules, and their simplicity is what makes them popular. The former entails dividing your after-tax, take-home income pay into three areas: needs (50%), savings (20%), and wants (30%). The 70/20/10 rule also follows a similar blueprint, recommending that your after-tax, take-home income be divided into segments that cater to expenses (70%), savings or reducing debt (20%), and investments and charitable donations (10%).

What Are the Principles of Financial Literacy?

There are five broad principles of financial literacy. Though other models may list different key components, the overarching goal of financial literacy is to educate individuals on how to earn , spend , save , borrow , and protect their money.

What Are Some Examples of Financial Literacy?

As a high school student transitions to college, they may be faced with the task of deciding which school to attend and how to finance their education. This may including how much money they should be saving from their after-school job, how the terms of their loan will work, and what opportunity costs exist throughout their decision-making process.

In this example, the student will make more financially responsible decisions if they are more financially literate. Financial literacy in this example extends to savings, employment, budgeting, loans, and financial planning. Using financial literacy and making smart decisions, the student can set themselves up for long-term success.

Financial literacy is the knowledge of how to make smart decisions with money. This includes preparing a budget, knowing how much to save, deciding favorable loan terms, understanding impacts to credit, and distinguishing different vehicles used for retirement. These skills help individuals make smarter decisions and act more responsibly with their personal finances.

Federal Reserve Bank of San Francisco. “ 2022 Findings from the Diary of Consumer Payment Choice ,” Page 6.

Financial Industry Regulatory Authority Investor Education Foundation, via Internet Archive. “ U.S. Survey Data at a Glance: Financial Knowledge and Decision-Making .”

U.S. Department of the Treasury. “ Financial Literacy and Education Commission .”

Mastercard NuData Security. “ 2020 Fraud Risk at a Glance .”

Board of Governors of the Federal Reserve System. “ Economic Well-Being of U.S. Households in 2020 ,” Pages 69–74 (Pages 75–80 of PDF).

TIAA Institute, via Global Financial Literacy Excellence Center. “ Millennials and Money: Financial Preparedness and Money Management Practices Before COVID-19 ,” Pages 5–7, 14, and 22.

AnnualCreditReport.com. “ Home Page .”

Board of Governors of the Federal Reserve System. “ Economic Well-Being of U.S. Households in 2021 .”

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Should All Schools Teach Financial Literacy?

And should students have to understand topics like budgets, consumer credit, student debt, saving and investing in order to graduate?

importance of financial literacy essay

By Shannon Doyne

Students in U.S. high schools can get free digital access to The New York Times until Sept. 1, 2021.

How well do you think you manage money? Has anyone ever taught you any money-management skills? In general, how “financially literate” do you think you are? For instance, do you know how to budget and save? How to set up a bank account? Apply for financial aid and college loans?

Does your school teach these skills already? If not, do you wish it did? Should passing a financial-literacy class be a requirement for graduating from high school?

In “ Pandemic Helps Stir Interest in Teaching Financial Literacy ,” Ann Carrns writes about the growing interest in teaching students personal financial skills in U.S. schools:

As of early 2020, high school students in 21 states were required to take a personal finance course to graduate, according to the Council for Economic Education , which promotes economic and personal finance education for students in kindergarten through high school. That was a net gain of four states since the council’s previous count two years earlier. “We are making progress,” said Billy J. Hensley, president and chief executive of the National Endowment for Financial Education, a nonprofit group that promotes effective financial education. “I do think the pandemic is bringing more attention to the topic,” he said, noting that after the financial crisis more than a decade ago there was also a flurry of financial literacy proposals in state legislatures. An increasing number of studies support the effectiveness of financial literacy education when taught by well-trained teachers, said Nan J. Morrison, chief executive of the Council for Economic Education. And more teachers now say they feel confident teaching the material. A study released in March by researchers at the University of Wisconsin and Montana State University found significant increases in teacher participation in professional development. Still, the rigor of high school financial education varies. Just six states require high school students to complete a semester-long, stand-alone personal finance course, the council’s 2020 report found. Some states permit shorter courses or include the content as part of another class. In states that don’t require financial instruction, some schools opt to teach it and do an excellent job, but others ignore the subject completely — and they tend to be schools in less affluent districts, Mr. Hensley said.

The article also outlines the specifics on what the curriculum might look like:

Many financial literacy advocates consider a full-semester course the gold standard for personal finance instruction. Rebecca Maxcy, director of the Financial Education Initiative at the University of Chicago, said many courses focused mainly on skills, like writing a check or filing taxes. While those lessons can be helpful, she said, it’s important for courses to include discussions of how personal values and attitudes about money influence behavior, as well as an examination of the financial systems and potential barriers that students will encounter in the world of money. Questions like “Who benefits when you open a bank account?” can prompt meaningful discussions, she said. Some curriculum options, however, offer more condensed, basic instruction. Everfi, a digital instructional company, offers a free seven-session program for high school financial literacy. Students take interactive, self-guided lessons in topics like banking, budgeting and college financing. Sidney Strause, a freshman at Marshall University in West Virginia, said she had taken Everfi’s course as a junior in high school. The lessons were assigned as part of another course she was taking, and typically took 45 minutes to an hour to complete. “It taught me how to budget and save,” she said. “It’s crucial to adulthood.” Sometimes she would do the lessons at home and discuss them with her mother, she said, which led her mother to create a budget and set financial goals.

Students, read the entire article, then tell us:

What, if anything, in this article resonates with you and your experiences with learning about money?

Do you think schools should offer courses on financial literacy? Should taking them be mandatory for graduation?

What topics should financial literacy instruction in schools cover? In what grade should students start learning about it?

One of the experts quoted in this piece says that it’s important for courses to include discussions of how personal values and attitudes about money influence behavior. What are your general attitudes toward money, and where do you think you learned these attitudes? For instance, how much does making money factor into your goals for a future career?

Why do you think that some people believe the interest in teaching students skills about managing money increased during the pandemic? In this time, did you experience or witness any events that made you wish you had some knowledge of personal finances — or that made you grateful for what you know?

Earlier this year, the price of GameStop stock soared when individual traders, including some teenagers, purchased many shares as a way to both make money and retaliate against large hedge funds that forecast the stock losing value. Did you learn about this situation as it happened? Did you participate? Did any of your teachers talk about it, and if so, what did they say? If you have specific thoughts to contribute, answer our Student Opinion question, “ Should All Young People Learn How to Invest in the Stock Market? ”

About Student Opinion

• Find all of our Student Opinion questions in this column . • Have an idea for a Student Opinion question? Tell us about it . • Learn more about how to use our free daily writing prompts for remote learning .

Students 13 and older in the United States and the United Kingdom, and 16 and older elsewhere, are invited to comment. All comments are moderated by the Learning Network staff, but please keep in mind that once your comment is accepted, it will be made public.

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  • Published: 24 January 2019

Financial literacy and the need for financial education: evidence and implications

  • Annamaria Lusardi 1  

Swiss Journal of Economics and Statistics volume  155 , Article number:  1 ( 2019 ) Cite this article

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1 Introduction

Throughout their lifetime, individuals today are more responsible for their personal finances than ever before. With life expectancies rising, pension and social welfare systems are being strained. In many countries, employer-sponsored defined benefit (DB) pension plans are swiftly giving way to private defined contribution (DC) plans, shifting the responsibility for retirement saving and investing from employers to employees. Individuals have also experienced changes in labor markets. Skills are becoming more critical, leading to divergence in wages between those with a college education, or higher, and those with lower levels of education. Simultaneously, financial markets are rapidly changing, with developments in technology and new and more complex financial products. From student loans to mortgages, credit cards, mutual funds, and annuities, the range of financial products people have to choose from is very different from what it was in the past, and decisions relating to these financial products have implications for individual well-being. Moreover, the exponential growth in financial technology (fintech) is revolutionizing the way people make payments, decide about their financial investments, and seek financial advice. In this context, it is important to understand how financially knowledgeable people are and to what extent their knowledge of finance affects their financial decision-making.

An essential indicator of people’s ability to make financial decisions is their level of financial literacy. The Organisation for Economic Co-operation and Development (OECD) aptly defines financial literacy as not only the knowledge and understanding of financial concepts and risks but also the skills, motivation, and confidence to apply such knowledge and understanding in order to make effective decisions across a range of financial contexts, to improve the financial well-being of individuals and society, and to enable participation in economic life. Thus, financial literacy refers to both knowledge and financial behavior, and this paper will analyze research on both topics.

As I describe in more detail below, findings around the world are sobering. Financial literacy is low even in advanced economies with well-developed financial markets. On average, about one third of the global population has familiarity with the basic concepts that underlie everyday financial decisions (Lusardi and Mitchell, 2011c ). The average hides gaping vulnerabilities of certain population subgroups and even lower knowledge of specific financial topics. Furthermore, there is evidence of a lack of confidence, particularly among women, and this has implications for how people approach and make financial decisions. In the following sections, I describe how we measure financial literacy, the levels of literacy we find around the world, the implications of those findings for financial decision-making, and how we can improve financial literacy.

2 How financially literate are people?

2.1 measuring financial literacy: the big three.

In the context of rapid changes and constant developments in the financial sector and the broader economy, it is important to understand whether people are equipped to effectively navigate the maze of financial decisions that they face every day. To provide the tools for better financial decision-making, one must assess not only what people know but also what they need to know, and then evaluate the gap between those things. There are a few fundamental concepts at the basis of most financial decision-making. These concepts are universal, applying to every context and economic environment. Three such concepts are (1) numeracy as it relates to the capacity to do interest rate calculations and understand interest compounding; (2) understanding of inflation; and (3) understanding of risk diversification. Translating these concepts into easily measured financial literacy metrics is difficult, but Lusardi and Mitchell ( 2008 , 2011b , 2011c ) have designed a standard set of questions around these concepts and implemented them in numerous surveys in the USA and around the world.

Four principles informed the design of these questions, as described in detail by Lusardi and Mitchell ( 2014 ). The first is simplicity : the questions should measure knowledge of the building blocks fundamental to decision-making in an intertemporal setting. The second is relevance : the questions should relate to concepts pertinent to peoples’ day-to-day financial decisions over the life cycle; moreover, they must capture general rather than context-specific ideas. Third is brevity : the number of questions must be few enough to secure widespread adoption; and fourth is capacity to differentiate , meaning that questions should differentiate financial knowledge in such a way as to permit comparisons across people. Each of these principles is important in the context of face-to-face, telephone, and online surveys.

Three basic questions (since dubbed the “Big Three”) to measure financial literacy have been fielded in many surveys in the USA, including the National Financial Capability Study (NFCS) and, more recently, the Survey of Consumer Finances (SCF), and in many national surveys around the world. They have also become the standard way to measure financial literacy in surveys used by the private sector. For example, the Aegon Center for Longevity and Retirement included the Big Three questions in the 2018 Aegon Retirement Readiness Survey, covering around 16,000 people in 15 countries. Both ING and Allianz, but also investment funds, and pension funds have used the Big Three to measure financial literacy. The exact wording of the questions is provided in Table  1 .

2.2 Cross-country comparison

The first examination of financial literacy using the Big Three was possible due to a special module on financial literacy and retirement planning that Lusardi and Mitchell designed for the 2004 Health and Retirement Study (HRS), which is a survey of Americans over age 50. Astonishingly, the data showed that only half of older Americans—who presumably had made many financial decisions in their lives—could answer the two basic questions measuring understanding of interest rates and inflation (Lusardi and Mitchell, 2011b ). And just one third demonstrated understanding of these two concepts and answered the third question, measuring understanding of risk diversification, correctly. It is sobering that recent US surveys, such as the 2015 NFCS, the 2016 SCF, and the 2017 Survey of Household Economics and Financial Decisionmaking (SHED), show that financial knowledge has remained stubbornly low over time.

Over time, the Big Three have been added to other national surveys across countries and Lusardi and Mitchell have coordinated a project called Financial Literacy around the World (FLat World), which is an international comparison of financial literacy (Lusardi and Mitchell, 2011c ).

Findings from the FLat World project, which so far includes data from 15 countries, including Switzerland, highlight the urgent need to improve financial literacy (see Table  2 ). Across countries, financial literacy is at a crisis level, with the average rate of financial literacy, as measured by those answering correctly all three questions, at around 30%. Moreover, only around 50% of respondents in most countries are able to correctly answer the two financial literacy questions on interest rates and inflation correctly. A noteworthy point is that most countries included in the FLat World project have well-developed financial markets, which further highlights the cause for alarm over the demonstrated lack of the financial literacy. The fact that levels of financial literacy are so similar across countries with varying levels of economic development—indicating that in terms of financial knowledge, the world is indeed flat —shows that income levels or ubiquity of complex financial products do not by themselves equate to a more financially literate population.

Other noteworthy findings emerge in Table  2 . For instance, as expected, understanding of the effects of inflation (i.e., of real versus nominal values) among survey respondents is low in countries that have experienced deflation rather than inflation: in Japan, understanding of inflation is at 59%; in other countries, such as Germany, it is at 78% and, in the Netherlands, it is at 77%. Across countries, individuals have the lowest level of knowledge around the concept of risk, and the percentage of correct answers is particularly low when looking at knowledge of risk diversification. Here, we note the prevalence of “do not know” answers. While “do not know” responses hover around 15% on the topic of interest rates and 18% for inflation, about 30% of respondents—in some countries even more—are likely to respond “do not know” to the risk diversification question. In Switzerland, 74% answered the risk diversification question correctly and 13% reported not knowing the answer (compared to 3% and 4% responding “do not know” for the interest rates and inflation questions, respectively).

These findings are supported by many other surveys. For example, the 2014 Standard & Poor’s Global Financial Literacy Survey shows that, around the world, people know the least about risk and risk diversification (Klapper, Lusardi, and Van Oudheusden, 2015 ). Similarly, results from the 2016 Allianz survey, which collected evidence from ten European countries on money, financial literacy, and risk in the digital age, show very low-risk literacy in all countries covered by the survey. In Austria, Germany, and Switzerland, which are the three top-performing nations in term of financial knowledge, less than 20% of respondents can answer three questions related to knowledge of risk and risk diversification (Allianz, 2017 ).

Other surveys show that the findings about financial literacy correlate in an expected way with other data. For example, performance on the mathematics and science sections of the OECD Program for International Student Assessment (PISA) correlates with performance on the Big Three and, specifically, on the question relating to interest rates. Similarly, respondents in Sweden, which has experienced pension privatization, performed better on the risk diversification question (at 68%), than did respondents in Russia and East Germany, where people have had less exposure to the stock market. For researchers studying financial knowledge and its effects, these findings hint to the fact that financial literacy could be the result of choice and not an exogenous variable.

To summarize, financial literacy is low across the world and higher national income levels do not equate to a more financially literate population. The design of the Big Three questions enables a global comparison and allows for a deeper understanding of financial literacy. This enhances the measure’s utility because it helps to identify general and specific vulnerabilities across countries and within population subgroups, as will be explained in the next section.

2.3 Who knows the least?

Low financial literacy on average is exacerbated by patterns of vulnerability among specific population subgroups. For instance, as reported in Lusardi and Mitchell ( 2014 ), even though educational attainment is positively correlated with financial literacy, it is not sufficient. Even well-educated people are not necessarily savvy about money. Financial literacy is also low among the young. In the USA, less than 30% of respondents can correctly answer the Big Three by age 40, even though many consequential financial decisions are made well before that age (see Fig.  1 ). Similarly, in Switzerland, only 45% of those aged 35 or younger are able to correctly answer the Big Three questions. Footnote 1 And if people may learn from making financial decisions, that learning seems limited. As shown in Fig.  1 , many older individuals, who have already made decisions, cannot answer three basic financial literacy questions.

figure 1

Financial literacy across age in the USA. This figure shows the percentage of respondents who answered correctly all Big Three questions by age group (year 2015). Source: 2015 US National Financial Capability Study

A gender gap in financial literacy is also present across countries. Women are less likely than men to answer questions correctly. The gap is present not only on the overall scale but also within each topic, across countries of different income levels, and at different ages. Women are also disproportionately more likely to indicate that they do not know the answer to specific questions (Fig.  2 ), highlighting overconfidence among men and awareness of lack of knowledge among women. Even in Finland, which is a relatively equal society in terms of gender, 44% of men compared to 27% of women answer all three questions correctly and 18% of women give at least one “do not know” response versus less than 10% of men (Kalmi and Ruuskanen, 2017 ). These figures further reflect the universality of the Big Three questions. As reported in Fig.  2 , “do not know” responses among women are prevalent not only in European countries, for example, Switzerland, but also in North America (represented in the figure by the USA, though similar findings are reported in Canada) and in Asia (represented in the figure by Japan). Those interested in learning more about the differences in financial literacy across demographics and other characteristics can consult Lusardi and Mitchell ( 2011c , 2014 ).

figure 2

Gender differences in the responses to the Big Three questions. Sources: USA—Lusardi and Mitchell, 2011c ; Japan—Sekita, 2011 ; Switzerland—Brown and Graf, 2013

3 Does financial literacy matter?

A growing number of financial instruments have gained importance, including alternative financial services such as payday loans, pawnshops, and rent to own stores that charge very high interest rates. Simultaneously, in the changing economic landscape, people are increasingly responsible for personal financial planning and for investing and spending their resources throughout their lifetime. We have witnessed changes not only in the asset side of household balance sheets but also in the liability side. For example, in the USA, many people arrive close to retirement carrying a lot more debt than previous generations did (Lusardi, Mitchell, and Oggero, 2018 ). Overall, individuals are making substantially more financial decisions over their lifetime, living longer, and gaining access to a range of new financial products. These trends, combined with low financial literacy levels around the world and, particularly, among vulnerable population groups, indicate that elevating financial literacy must become a priority for policy makers.

There is ample evidence of the impact of financial literacy on people’s decisions and financial behavior. For example, financial literacy has been proven to affect both saving and investment behavior and debt management and borrowing practices. Empirically, financially savvy people are more likely to accumulate wealth (Lusardi and Mitchell, 2014 ). There are several explanations for why higher financial literacy translates into greater wealth. Several studies have documented that those who have higher financial literacy are more likely to plan for retirement, probably because they are more likely to appreciate the power of interest compounding and are better able to do calculations. According to the findings of the FLat World project, answering one additional financial question correctly is associated with a 3–4 percentage point greater probability of planning for retirement; this finding is seen in Germany, the USA, Japan, and Sweden. Financial literacy is found to have the strongest impact in the Netherlands, where knowing the right answer to one additional financial literacy question is associated with a 10 percentage point higher probability of planning (Mitchell and Lusardi, 2015 ). Empirically, planning is a very strong predictor of wealth; those who plan arrive close to retirement with two to three times the amount of wealth as those who do not plan (Lusardi and Mitchell, 2011b ).

Financial literacy is also associated with higher returns on investments and investment in more complex assets, such as stocks, which normally offer higher rates of return. This finding has important consequences for wealth; according to the simulation by Lusardi, Michaud, and Mitchell ( 2017 ), in the context of a life-cycle model of saving with many sources of uncertainty, from 30 to 40% of US retirement wealth inequality can be accounted for by differences in financial knowledge. These results show that financial literacy is not a sideshow, but it plays a critical role in saving and wealth accumulation.

Financial literacy is also strongly correlated with a greater ability to cope with emergency expenses and weather income shocks. Those who are financially literate are more likely to report that they can come up with $2000 in 30 days or that they are able to cover an emergency expense of $400 with cash or savings (Hasler, Lusardi, and Oggero, 2018 ).

With regard to debt behavior, those who are more financially literate are less likely to have credit card debt and more likely to pay the full balance of their credit card each month rather than just paying the minimum due (Lusardi and Tufano, 2009 , 2015 ). Individuals with higher financial literacy levels also are more likely to refinance their mortgages when it makes sense to do so, tend not to borrow against their 401(k) plans, and are less likely to use high-cost borrowing methods, e.g., payday loans, pawn shops, auto title loans, and refund anticipation loans (Lusardi and de Bassa Scheresberg, 2013 ).

Several studies have documented poor debt behavior and its link to financial literacy. Moore ( 2003 ) reported that the least financially literate are also more likely to have costly mortgages. Lusardi and Tufano ( 2015 ) showed that the least financially savvy incurred high transaction costs, paying higher fees and using high-cost borrowing methods. In their study, the less knowledgeable also reported excessive debt loads and an inability to judge their debt positions. Similarly, Mottola ( 2013 ) found that those with low financial literacy were more likely to engage in costly credit card behavior, and Utkus and Young ( 2011 ) concluded that the least literate were more likely to borrow against their 401(k) and pension accounts.

Young people also struggle with debt, in particular with student loans. According to Lusardi, de Bassa Scheresberg, and Oggero ( 2016 ), Millennials know little about their student loans and many do not attempt to calculate the payment amounts that will later be associated with the loans they take. When asked what they would do, if given the chance to revisit their student loan borrowing decisions, about half of Millennials indicate that they would make a different decision.

Finally, a recent report on Millennials in the USA (18- to 34-year-olds) noted the impact of financial technology (fintech) on the financial behavior of young individuals. New and rapidly expanding mobile payment options have made transactions easier, quicker, and more convenient. The average user of mobile payments apps and technology in the USA is a high-income, well-educated male who works full time and is likely to belong to an ethnic minority group. Overall, users of mobile payments are busy individuals who are financially active (holding more assets and incurring more debt). However, mobile payment users display expensive financial behaviors, such as spending more than they earn, using alternative financial services, and occasionally overdrawing their checking accounts. Additionally, mobile payment users display lower levels of financial literacy (Lusardi, de Bassa Scheresberg, and Avery, 2018 ). The rapid growth in fintech around the world juxtaposed with expensive financial behavior means that more attention must be paid to the impact of mobile payment use on financial behavior. Fintech is not a substitute for financial literacy.

4 The way forward for financial literacy and what works

Overall, financial literacy affects everything from day-to-day to long-term financial decisions, and this has implications for both individuals and society. Low levels of financial literacy across countries are correlated with ineffective spending and financial planning, and expensive borrowing and debt management. These low levels of financial literacy worldwide and their widespread implications necessitate urgent efforts. Results from various surveys and research show that the Big Three questions are useful not only in assessing aggregate financial literacy but also in identifying vulnerable population subgroups and areas of financial decision-making that need improvement. Thus, these findings are relevant for policy makers and practitioners. Financial illiteracy has implications not only for the decisions that people make for themselves but also for society. The rapid spread of mobile payment technology and alternative financial services combined with lack of financial literacy can exacerbate wealth inequality.

To be effective, financial literacy initiatives need to be large and scalable. Schools, workplaces, and community platforms provide unique opportunities to deliver financial education to large and often diverse segments of the population. Furthermore, stark vulnerabilities across countries make it clear that specific subgroups, such as women and young people, are ideal targets for financial literacy programs. Given women’s awareness of their lack of financial knowledge, as indicated via their “do not know” responses to the Big Three questions, they are likely to be more receptive to financial education.

The near-crisis levels of financial illiteracy, the adverse impact that it has on financial behavior, and the vulnerabilities of certain groups speak of the need for and importance of financial education. Financial education is a crucial foundation for raising financial literacy and informing the next generations of consumers, workers, and citizens. Many countries have seen efforts in recent years to implement and provide financial education in schools, colleges, and workplaces. However, the continuously low levels of financial literacy across the world indicate that a piece of the puzzle is missing. A key lesson is that when it comes to providing financial education, one size does not fit all. In addition to the potential for large-scale implementation, the main components of any financial literacy program should be tailored content, targeted at specific audiences. An effective financial education program efficiently identifies the needs of its audience, accurately targets vulnerable groups, has clear objectives, and relies on rigorous evaluation metrics.

Using measures like the Big Three questions, it is imperative to recognize vulnerable groups and their specific needs in program designs. Upon identification, the next step is to incorporate this knowledge into financial education programs and solutions.

School-based education can be transformational by preparing young people for important financial decisions. The OECD’s Programme for International Student Assessment (PISA), in both 2012 and 2015, found that, on average, only 10% of 15-year-olds achieved maximum proficiency on a five-point financial literacy scale. As of 2015, about one in five of students did not have even basic financial skills (see OECD, 2017 ). Rigorous financial education programs, coupled with teacher training and high school financial education requirements, are found to be correlated with fewer defaults and higher credit scores among young adults in the USA (Urban, Schmeiser, Collins, and Brown, 2018 ). It is important to target students and young adults in schools and colleges to provide them with the necessary tools to make sound financial decisions as they graduate and take on responsibilities, such as buying cars and houses, or starting retirement accounts. Given the rising cost of education and student loan debt and the need of young people to start contributing as early as possible to retirement accounts, the importance of financial education in school cannot be overstated.

There are three compelling reasons for having financial education in school. First, it is important to expose young people to the basic concepts underlying financial decision-making before they make important and consequential financial decisions. As noted in Fig.  1 , financial literacy is very low among the young and it does not seem to increase a lot with age/generations. Second, school provides access to financial literacy to groups who may not be exposed to it (or may not be equally exposed to it), for example, women. Third, it is important to reduce the costs of acquiring financial literacy, if we want to promote higher financial literacy both among individuals and among society.

There are compelling reasons to have personal finance courses in college as well. In the same way in which colleges and university offer courses in corporate finance to teach how to manage the finances of firms, so today individuals need the knowledge to manage their own finances over the lifetime, which in present discounted value often amount to large values and are made larger by private pension accounts.

Financial education can also be efficiently provided in workplaces. An effective financial education program targeted to adults recognizes the socioeconomic context of employees and offers interventions tailored to their specific needs. A case study conducted in 2013 with employees of the US Federal Reserve System showed that completing a financial literacy learning module led to significant changes in retirement planning behavior and better-performing investment portfolios (Clark, Lusardi, and Mitchell, 2017 ). It is also important to note the delivery method of these programs, especially when targeted to adults. For instance, video formats have a significantly higher impact on financial behavior than simple narratives, and instruction is most effective when it is kept brief and relevant (Heinberg et al., 2014 ).

The Big Three also show that it is particularly important to make people familiar with the concepts of risk and risk diversification. Programs devoted to teaching risk via, for example, visual tools have shown great promise (Lusardi et al., 2017 ). The complexity of some of these concepts and the costs of providing education in the workplace, coupled with the fact that many older individuals may not work or work in firms that do not offer such education, provide other reasons why financial education in school is so important.

Finally, it is important to provide financial education in the community, in places where people go to learn. A recent example is the International Federation of Finance Museums, an innovative global collaboration that promotes financial knowledge through museum exhibits and the exchange of resources. Museums can be places where to provide financial literacy both among the young and the old.

There are a variety of other ways in which financial education can be offered and also targeted to specific groups. However, there are few evaluations of the effectiveness of such initiatives and this is an area where more research is urgently needed, given the statistics reported in the first part of this paper.

5 Concluding remarks

The lack of financial literacy, even in some of the world’s most well-developed financial markets, is of acute concern and needs immediate attention. The Big Three questions that were designed to measure financial literacy go a long way in identifying aggregate differences in financial knowledge and highlighting vulnerabilities within populations and across topics of interest, thereby facilitating the development of tailored programs. Many such programs to provide financial education in schools and colleges, workplaces, and the larger community have taken existing evidence into account to create rigorous solutions. It is important to continue making strides in promoting financial literacy, by achieving scale and efficiency in future programs as well.

In August 2017, I was appointed Director of the Italian Financial Education Committee, tasked with designing and implementing the national strategy for financial literacy. I will be able to apply my research to policy and program initiatives in Italy to promote financial literacy: it is an essential skill in the twenty-first century, one that individuals need if they are to thrive economically in today’s society. As the research discussed in this paper well documents, financial literacy is like a global passport that allows individuals to make the most of the plethora of financial products available in the market and to make sound financial decisions. Financial literacy should be seen as a fundamental right and universal need, rather than the privilege of the relatively few consumers who have special access to financial knowledge or financial advice. In today’s world, financial literacy should be considered as important as basic literacy, i.e., the ability to read and write. Without it, individuals and societies cannot reach their full potential.

See Brown and Graf ( 2013 ).

Abbreviations

Defined benefit (refers to pension plan)

Defined contribution (refers to pension plan)

Financial Literacy around the World

National Financial Capability Study

Organisation for Economic Co-operation and Development

Programme for International Student Assessment

Survey of Consumer Finances

Survey of Household Economics and Financial Decisionmaking

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Acknowledgements

This paper represents a summary of the keynote address I gave to the 2018 Annual Meeting of the Swiss Society of Economics and Statistics. I would like to thank Monika Butler, Rafael Lalive, anonymous reviewers, and participants of the Annual Meeting for useful discussions and comments, and Raveesha Gupta for editorial support. All errors are my responsibility.

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Lusardi, A. Financial literacy and the need for financial education: evidence and implications. Swiss J Economics Statistics 155 , 1 (2019). https://doi.org/10.1186/s41937-019-0027-5

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importance of financial literacy essay

The Importance of Financial Literacy: Opening a New Field

We undertake an assessment of our two decades of research on financial literacy, building on our empirical research and theoretical work casting financial knowledge as a form of investment in human capital. We also draw on recent data to determine who is the most – and least – financially savvy in the United States, and we highlight the similarity of our results in other countries. A number of convincing studies is now available, from which we draw conclusions about the effects and consequences of financial illiteracy, and what can be done to fill these gaps. We conclude by offering our thoughts on implications for teaching, financial literacy programs, and future research.

The research was supported by the Pension Research Council and Boettner Center at the Wharton School of the University of Pennsylvania. The authors thank Yong Yu for research assistance. Opinions and conclusions expressed herein are solely those of the authors and do not represent the opinions or policy of any institutions with which the authors are affiliated. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

I acknowledge research support for this work from the Health and Retirement Study at the University of Michigan, and the Pension Research Council/Boettner Center at The Wharton School of the University of Pennsylvania. I am an Independent Trustee of the Allspring Funds Board and I am a NBER Research Associate. None of these parties or institutions had the right to review or influence this paper in any way prior to circulation. Findings and conclusions are not the official views of any of the institutions with which I am affiliated.

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The Importance of Financial Literacy: Opening a New Field

We undertake an assessment of our two decades of research on financial literacy, building on our empirical research and theoretical work casting financial knowledge as a form of investment in human capital. We also draw on recent data to determine who is the most – and least – financially savvy in the United States, and we highlight the similarity of our results in other countries. A number of convincing studies is now available, from which we draw conclusions about the effects and consequences of financial illiteracy, and what can be done to fill these gaps. We conclude by offering our thoughts on implications for teaching, financial literacy programs, and future research.

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The Importance of Teaching Financial Literacy

Dr. benjamin washington.

  • April 21, 2021

‘Financial literacy’ on a blue background with related symbols around it.

Personal finance is a reality for every person, from high school students, first year college students, to working adults. Understanding how personal finance works is important to financial literacy and for both individuals and families. For this reason, teaching financial literacy is vital to the growth of the individual and the sustainability to working and high functioning adults.

To understand this importance, it is crucial that students and adults first know what financial literacy is and why it is important to teach it. Having a keen understanding of financial literacy can set up a path for success for families and for future leaders in organizations.

What is Financial Literacy?

Understanding what financial literacy is helps build self-confidence in individuals and helps with planning for the future. For the modern individual, the circumstances around the need to comprehend and master finances continues to grow. The term financial literacy represents knowing a range of skills and concepts that contribute to a person’s financial success. This can include topics such as debit and credit cards, credit reports, college financial aid , mortgages and more. Financial literacy comes from having the skills and ability to budget, invest, and facilitate personal financial management decisions.

Importance of Teaching Financial Literacy

Financial literacy is important for current money habits and also future preparation. The lack of financial literacy skills can lead to poor spending choices, increased debt, and a generational wealth gap. Learning to be financial literate has immediate results and also long term returns on investment.

Today’s students live in a world that has the benefits of technology, instant access to information, and the ability to communicate and advocate through different platforms. For students to be productive and engaging citizens, financial literacy will help with future decisions and set the foundation for personal responsibility and business skills.

Strategies and Activities for Teaching Financial Literacy

Focus on teaching concepts.

For the student new to financial literacy, there can be a feeling of being overwhelmed and confused. When it comes to teaching financial literacy, it is important to break down information by concepts. Learning financial literacy can start as early as middle school. However, high school is a fundamental place to learn about financial literacy.

During high school, students begin their first jobs, have new responsibilities such as learning how to drive, applying for college , and picking future career paths. Teaching effective financial literacy for high school students can prepare a young adult for a life of financial discipline and maximizing financial and educational investments.

Make Finances Personal

The reality is: finances are personal. Often, high school students will see only what is important to them presently, but may have difficulty planning ahead for the future and for personal goals. One strategy to make teaching financial literacy relevant is to allow students to learn the basics of personal finance but also find scenarios and real world situations that apply directly to them. This could include games, role playing, or a classroom discussion that focuses on the realities of paying rent, owning property, and saving and investing.

Teaching students the 7 Baby Steps  to personal finance created by Dave Ramsey is a quick and simple guide to planning finances. When teaching financial literacy, it is important to allow students multiple platforms and choices when learning how personal financial literacy is specific to their lives. There are multiple financial literacy games and interactive activities that can show students the realities of personal finance.

Help Students Plan Ahead

For high school students, time management and planning ahead becomes more important. When teaching financial literacy skills, one focus should be on planning and preparing for future finances. This includes creating a budget, paying yourself first with a savings account, obtaining a credit report, and investing in the future.

An example of teaching these financial literacy skills would be having a lesson on creating a personal budget or budget for a specific business. Teaching the concept of investing in the future could translate into teaching students about retirement savings accounts such as a 401(k) or 457(b). Students could do a research project that investigates which companies either currently or in the future they want to be involved with. These students could learn whether the company has a retirement savings plan or any stocks.

Expose Students to Resources

When teaching high school students financial literacy, it is important to keep lessons and activities relevant. Just as general curriculums such as English, science, math, and social studies lessons are enhanced by real, relevant, and student-centered activities, the same is true for financial literacy. This can be done by giving students access to resources to learn more about financial literacy. For students who want to learn lessons and do practice activities in the area of personal finance, The Khan Academy is a great resource.

Other students and teachers may prefer conversations and brief videos on real world examples. Dave Ramsey’s podcast and talk show covers a wide variety of topics including retirement plans, savings accounts, investing in stocks, and real estate.

Teaching financial literacy is beneficial to a student’s adulthood and to increasing opportunities for future homeowners, business leaders, and productive citizens. Expanding students’ knowledge and resource base allows for continued growth in financial literacy skills and real world applications.

  • #FinancialLiteracy

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Home - Blog - Financial Literacy for Youth: Why it Matters

Financial Literacy for Youth: Why it Matters

Jun 06, 2023

by United Way NCA

importance of financial literacy essay

In 2023, many young people will enter adulthood without the essential financial knowledge and skills they need to make informed choices about their money.

Consider this: Young Americans owe over $1 trillion in debt, and 70% of millennials live paycheck to paycheck. These alarming statistics highlight an urgent need for financial education among young people. Early-adulthood financial decisions can have lifelong consequences. Equipping young people with the tools to manage their money effectively helps them avoid the cycle of debt and economic insecurity that plagues many Americans well into adulthood, giving them the foundation to build a secure financial future.

United Way National Capital Area (United Way NCA) recognizes financial literacy’s vital role in expanding economic opportunity in our community. United Way NCA’s five Financial Empowerment Centers across DC, Maryland and Virginia provide access to high-quality financial services and guidance—at no cost—to individuals and families of all ages to assist them in creating economic stability. We are specifically focused on the economic opportunity of our region’s ALICE population. ALICE—Asset Limited, Income Constrained, Employed—represents the nearly 500,000 community members in the National Capital Area who are employed and earn more than the Federal Poverty Level, but still struggle to make ends meet.

What is Financial Literacy?

Financial literacy is the combined knowledge and skills required to make responsible and informed financial decisions that contribute to a sense of financial security and well-being.

Knowledge of financial concepts like saving, investing, spending and borrowing is the foundation of financial literacy. In addition, understanding credit management, asset building and how to reduce debt and avoid scams is critical to a healthy financial life.

The Repercussions of Low Financial Literacy

Why is financial literacy important? Because low financial literacy threatens the well-being of individuals and families, especially in underserved and low-income communities. Without a solid financial foundation, our youth are more susceptible to predatory lending and costly errors in managing debts and expenses that can lead to lifelong financial inequity.

Additionally, low financial literacy can lead to missed wealth-building opportunities and reduced access to higher education and professional development training. When young people lack the financial knowledge they need to make informed decisions, they are more likely to become trapped in cycles of poverty and debt. For example, poor spending and borrowing habits often result in low credit scores, contributing to higher financial insecurity.

Investing in financial literacy helps bridge the opportunity gap that exists in our underserved communities and empowers youth with the tools they need to break down economic barriers and lead financially secure lives.

The Financial Literacy Gap

According to a July 2022 FINRA Foundation national financial capability study , a persistent financial literacy gap exists in the U.S. Further, the study found that young people, Black/African American, Hispanic/Latino and low-income households remain more vulnerable to the consequences of low financial literacy than other Americans.

The study also showed that the above groups were more likely to exhibit psychological symptoms of financial stress, and younger people were 38% more likely to miss mortgage payments and 26% more likely to make hardship withdrawals from retirement accounts.

These findings highlight the importance of investing in financial education and access to services to help individuals and families build assets and gain economic opportunity. This is especially true for younger people across all demographics.

Financial Literacy: The First Step Toward Financial Capability

Financial education is fundamental to improving financial health and well-being for our communities, but developing financial capability is the ultimate goal. Financial capability is what happens when financial literacy knowledge is practiced and applied until it becomes second nature and drives behavior that consistently leads to positive economic outcomes.

It gives individuals the confidence to make informed financial decisions, take advantage of opportunities and build financial security for themselves and their families.

United Way NCA seeks to improve the lives of underserved individuals in our community by increasing economic opportunity for individuals and families across our region.

Our Financial Empowerment Centers teach fundamentals of budgeting, saving, investing, borrowing responsibly and other personal finance topics useful in everyday life and long-term financial planning.

Empowered with the knowledge and skills required to make responsible financial decisions, individuals will build the financial stability necessary for a successful future.

United Way NCA Financial Empowerment Centers provide financial services and expert guidance at no cost in a welcoming, supportive and inclusive environment. Our goal is to be a trusted resource for individuals and families in the communities we serve. For support around credit building, debt management, saving, starting a business, homebuying or completing your taxes, contact a United Way NCA Financial Empowerment Center near you . When none are ignored, all will thrive.

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Five Ways to Boost Financial Literacy Among College Students

Young woman typing on a calculator while holding a cell phone and a laptop in front of her. Illustrations surrounding her of dollar bills, piggy bank & financial reports.

Financial literacy is the ability to understand and make informed decisions about money. This includes spending, saving and investing, budgeting, building credit, borrowing money and repaying debt. Many college students graduate without understanding how to manage their money effectively, which often leads to financial struggles later in life. In fact, according to research, more than 40 percent of college students are not equipped with financial literacy knowledge and skills. Top personal finance concerns among college students include the cost of higher education, student loan debt and credit cards. (View the infographic, “ Banking on Knowledge: Financial Literacy Among American College Students ,” to learn more.)

As the financial world becomes increasingly complex and diverse, many academic libraries are seizing the opportunity to provide personal finance education to students and other members of their college communities. Here are five ways to get started:

College and university library collections should include relevant personal finance books, journals, databases and interactive learning tools such as FinancialFit . FinancialFit offers short, easy-to-understand personal finance lessons and videos to help individuals to make smart, informed financial decisions ― no matter where they are in their personal finance journey. Topics include monthly budgeting, managing debt, building credit, paying for college, living with roommates, starting work life, understanding taxes and more. Academic libraries can also curate and publish links to other online financial literacy resources such as webinars and podcasts.  

Many opportunities exist for personal finance education to be woven into a student’s academic experience. Librarians can work with faculty to develop standalone financial literacy courses or add personal finance topics or modules to existing business, math, health sciences or social sciences courses. The latter approach can help students develop personal finance skills that are relevant to their future careers.  

Academic libraries can team up with banks, credit unions and small business development centers to educate students on financial topics such as credit scores, student loan repayment, savings strategies, and managing the financial aspects of small business ventures. These partners can also provide resources such as financial calculators and budgeting tools for libraries to distribute to students.  

Fairs, game nights and other interactive activities can make learning about personal finance topics fun. These events can be promoted through social media and other marketing channels. April is Financial Literacy Month, a great time to launch a campaign to increase financial literacy among college students, faculty and other members of the college community. But don’t limit activities to just the month of April; keep them going all year long!  

Academic libraries can hire financial experts or partner with financial institutions to offer one-on-one financial coaching to students. Financial coaching involves working with a financial expert to develop a personalized financial plan that includes strategies for budgeting, saving, investing, managing debt and retirement planning. This service can be especially helpful to those who need more guidance. Academic libraries might also consider initiating peer-to-peer financial literacy counseling programs .

Academic libraries can play an essential role in increasing financial literacy among students. By providing access to financial literacy resources, integrating financial literacy into academic programs, partnering with financial institutions, hosting financial literacy events and providing one-on-one financial coaching, academic libraries can help students develop the practical skills they need to make informed financial decisions throughout their lives. Furthermore, by improving students’ financial literacy with each new graduating class, academic libraries can contribute to the financial well-being of future generations.

Ready to take the next step?

Add FinancialFit to your library’s e-learning collection.

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importance of financial literacy essay

Essay on Financial Literacy

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Financial literacy is an important skill to have in today’s world, where money is essential for survival. With the cost of living rising and the need for financial stability increasing, it is essential for people to understand the basics of financial literacy to ensure their financial wellbeing.

Financial literacy is the ability to understand and manage your finances. It involves understanding the basics of financial concepts such as budgeting, saving, investing, borrowing, and debt management. Financial literacy also involves understanding the different types of financial products and services available, such as banking, insurance, and retirement planning.

Financial literacy is essential in order to be able to make informed decisions regarding money. It is important to understand how to budget and manage your finances, as this will help to ensure that you don’t take on more debt than you can handle. Additionally, having a good understanding of the different types of investments available, as well as the best ways to save for the future, is essential for financial security.

It is also important to understand the different types of borrowing, including credit cards, loans, and mortgages, and the associated risks and benefits. Knowing how to compare and contrast different products and services can also help to ensure that you make the best decisions regarding your finances.

Financial literacy can be acquired through formal education, such as a college course, or through informal learning, such as reading articles and books or attending seminars and workshops. Additionally, financial literacy can be taught through real-world experiences, such as managing your own finances or working with a financial professional.

Financial literacy is a key skill to have in today’s world. Having a good understanding of financial concepts can help to ensure financial stability, as well as helping people to make informed decisions regarding their money. Therefore, it is important to ensure that everyone is aware of the importance of financial literacy, and that they have the opportunity to gain the necessary knowledge and skills.

FAQs Related to Essay on Financial Literacy

1. what is financial literacy.

Financial literacy is the ability to understand and use various financial skills, including personal financial management, budgeting, and investing. It’s important to have a good understanding of financial literacy to make sound financial decisions.

2. What are the benefits of financial literacy?

Financial literacy can help you make informed decisions about your finances and help you manage your money more effectively. It can also help you save money, reduce debt, and build wealth.

3. What are the key components of financial literacy?

The key components of financial literacy are budgeting, understanding taxes, knowing how to save and invest, understanding credit and debt, and understanding insurance.

4. How can I improve my financial literacy?

You can improve your financial literacy by reading books, attending courses or seminars, talking to professionals, and using online resources.

5. How can I teach my children financial literacy?

You can teach your children financial literacy by setting a good example, teaching them the basics of budgeting, talking to them about money, and encouraging them to get involved in financial decision-making.

6. What are the main financial principles?

The main financial principles are saving, spending, investing, borrowing, and managing debt.

7. What is the importance of financial literacy?

Financial literacy is important because it helps people make informed decisions about their finances. It can also help them save money, reduce debt, and build wealth.

8. What is the best way to learn financial literacy?

The best way to learn financial literacy is to read books, attend courses or seminars, talk to professionals, and use online resources.

9. What are the most important financial concepts to understand?

The most important financial concepts to understand are budgeting, understanding taxes, knowing how to save and invest, understanding credit and debt, and understanding insurance.

10. How can I become financially literate?

You can become financially literate by reading books, attending courses or seminars, talking to professionals, and using online resources.

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Home — Essay Samples — Economics — Money — Importance of Money Management and Financial Literacy for Students

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Importance of Money Management and Financial Literacy for Students

  • Categories: Literacy Money Personal Finance

About this sample

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Words: 1537 |

Published: Aug 14, 2023

Words: 1537 | Pages: 3 | 8 min read

Table of contents

Importance of financial literacy and financial education, how other countries apply financial literacy, what can be done within our current school systems, my own financial literacy level.

  • Anderloni, L. and Vandone, D. (2010), “Risk of overindebtedness and behavioral factors”, Working Paper No 25, Social Science Research Network, Santa Monica, CA.
  • ASIC (2011), “National financial literacy strategy: Australian securities & investment commission Report No. 229”, available at: www.financialliteracy.gov.au/media/218312/national-financialliteracy-strategy.pdf (accessed 23 October 2016).
  • Atkinson, A. and Messy, F. (2012), “Measuring financial literacy: results of the OECD/International Network on Financial Education (INFE) Pilot study”, Working Paper No. 15, OECD Working Papers on Finance, Insurance and Private Pensions, OECD Publishing, Paris.
  • Filipiak, U. and Walle, Y.M. (2015), “The financial literacy gender gap: a question of nature or nurture?”, Discussion Papers No. 176, Courant Research Centre: Poverty, Equity and Growth.
  • Huston, S.J. (2010), “Measuring financial literacy”, The Journal of Consumer Affairs, Vol. 44 No. 2, pp. 296-316.
  • National Strategy for Financial Literacy (2012), “Commission for financial literacy and retirement income”, available at: www.cflri.org.nz/sites/default/files/docs/FL-NS-National%20Strategy2012-Aug.pdf (accessed 24 October 2016).
  • Organisation for Economic Co-operation and Development (OECD) (2012), OECD/INFE High-Level Principles on National Strategies for Financial Education, OECD Publishing, Paris.
  • Vitt, L.A. (2004), “Consumers financial decisions and the psychology of values”, Journal of Financial Service Professionals, Vol. 58 No. 6, pp. 68-78.

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importance of financial literacy essay

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  1. Financial literacy Essay Example

    importance of financial literacy essay

  2. Essay on importance of financial literacy. The Importance Of Financial

    importance of financial literacy essay

  3. The Importance of Financial Literacy

    importance of financial literacy essay

  4. Why Financial Literacy for Students is Important

    importance of financial literacy essay

  5. Propper Financial Literacy Essay Example

    importance of financial literacy essay

  6. The Importance of Financial Literacy

    importance of financial literacy essay

VIDEO

  1. Financial Literacy

  2. Financial Literacy

  3. IMPORTANCE OF FINANCIAL LITERACY IN BUILDING STRONG COMMUNITIES. Dr. Babangida Muhammad Musa

  4. Financial literacy tips

COMMENTS

  1. Essay on Financial Literacy for Students and Children

    Financial literacy helps people in becoming independent and self-sufficient. It empowers you with basic knowledge of investment options, financial markets, capital budgeting, etc. Understanding your money mitigates the danger of facing a fraud-like situation.

  2. Financial Literacy: What It Is, and Why It Is So Important

    Khadija Khartit Fact checked by Kirsten Rohrs Schmitt What Is Financial Literacy? Financial literacy is the ability to understand and effectively use various financial skills, including...

  3. The importance of financial literacy and its impact on financial

    Importantly, financial literacy matters: it helps people make savvy financial decisions, including being less influenced by framing, better understand information that is provided to them, better understand the workings of insurance, and being more comfortable using basic financial instruments.

  4. Financial Literacy

    Budgeting In budgeting, there are four main uses for money that determine a budget: spending, investing, saving, and giving away. Creating the right balance throughout the primary uses of money allows individuals to better allocate their income, resulting in financial security and prosperity.

  5. The Importance of Financial Literacy

    The Importance of Financial Literacy On: April 29, 2019 In: Financial Literacy Graphic Designed by: Sana Imran BRB Bottomline: Amidst a financial literacy crisis, unprecedented in scope and scale, where millions of Americans worry and struggle to make ends meet, why do we not mention financial literacy more?

  6. Should All Schools Teach Financial Literacy?

    Many financial literacy advocates consider a full-semester course the gold standard for personal finance instruction. Rebecca Maxcy, director of the Financial Education Initiative at the...

  7. What is financial literacy? (article)

    Additionally, it is important to be aware of the different types of accounts and products available to you, so you can choose the one that best meets your needs. Overall, financial literacy is about empowering yourself with the knowledge and skills to make smart decisions with your money. It is a lifelong journey, but one that is well worth taking.

  8. Financial literacy and the need for financial education: evidence and

    Financial literacy and ... The economic importance of financial literacy: theory and evidence. Journal of Economic Literature, 52(1), 5-44. Article Google Scholar Lusardi, A., Mitchell, O. S., & Oggero, N. (2018). The changing face of debt and financial fragility at older ages. American Economic Association Papers and Proceedings, 108 ...

  9. PDF The importance of financial literacy and its impact on financial wellbeing

    Importantly, financial literacy matters: it helps people make savvy financial decisions, including being less influenced by framing, better understand information that is provided to them, better understand the workings of insurance, and being more comfortable using basic financial instruments.

  10. PDF The Economic Importance of Financial Literacy: Theory and Evidence

    1 The Economic Importance of Financial Literacy: Theory and Evidence Annamaria Lusardi and Olivia S. Mitchell 1. Introduction Financial markets around the world have become increasingly accessible to the 'small investor,' as new products and financial services grow widespread.

  11. The Economic Importance of Financial Literacy: Theory and Evidence

    The Economic Importance of Financial Literacy: Theory and Evidence Annamaria Lusardi & Olivia S. Mitchell Working Paper 18952 DOI 10.3386/w18952 Issue Date April 2013 In this paper, we undertake an assessment of the rapidly growing body of research on financial literacy.

  12. The Importance of Financial Literacy: Opening a New Field

    The Importance of Financial Literacy: Opening a New Field Annamaria Lusardi & Olivia S. Mitchell Working Paper 31145 DOI 10.3386/w31145 Issue Date April 2023

  13. Why Financial Literacy Is Important And How You Can Improve Yours

    Financial literacy refers to your grasp and effective use of various financial skills, from budgeting and saving to debt management and retirement planning. It equips you with the knowledge to ...

  14. PDF The importance of financial literacy

    The importance of financial literacy † Strong performance in mathematics and reading do not neces-sarily mean strong literacy skills. † Only one in ten students across participating OECD countries and economies is able to tackle the hardest financial literacy tasks. † About 15% of students, on average, score below the baseline

  15. The Importance of Financial Literacy: Opening a New Field

    The Importance of Financial Literacy: Opening a New Field. We undertake an assessment of our two decades of research on financial literacy, building on our empirical research and theoretical work casting financial knowledge as a form of investment in human capital. We also draw on recent data to determine who is the most - and least ...

  16. The Importance of Teaching Financial Literacy

    Financial literacy is important for current money habits and also future preparation. The lack of financial literacy skills can lead to poor spending choices, increased debt, and a generational wealth gap. Learning to be financial literate has immediate results and also long term returns on investment.

  17. Youth Financial Literacy: Why Is it Important?

    Financial literacy is the combined knowledge and skills required to make responsible and informed financial decisions that contribute to a sense of financial security and well-being. Knowledge of financial concepts like saving, investing, spending and borrowing is the foundation of financial literacy.

  18. A Study on Financial Literacy and Financial Behaviour

    Financial literacy helps individuals make more assertive and efficient decisions in the monetary context of their lives. This paper measures the level of financial literacy of individuals...

  19. Full article: Role of financial literacy in achieving financial

    It gives a simplistic overview of what financial literacy is, why is it important and how it can be used to achieve financial inclusion and hence is beneficial for specialist and non-specialist readers.The importance of this work can be evidently established as in the series of projects under the theme of UNSDG, financial literacy and financial ...

  20. The Importance of Financial Literacy: Opening a New Field

    A number of convincing studies is now available, from which we draw conclusions about the effects and consequences of financial illiteracy, and what can be done to fill these gaps. We conclude by offering our thoughts on implications for teaching, financial literacy programs, and future research.

  21. Importance of Financial Literacy: [Essay Example], 1983 words

    Financial literacy enables entrepreneurs to take responsibility for every rupee, and to maintain a sharp focus on costs and the simple measures of cash flow, all of which are critical in maximizing a small business's chance of survival. Throughout their business journey, entrepreneurs face complex decisions.

  22. Five Ways to Boost Financial Literacy Among College Students

    Partner with financial institutions or nonprofit organizations to deliver financial literacy workshops and seminars. Academic libraries can team up with banks, credit unions and small business development centers to educate students on financial topics such as credit scores, student loan repayment, savings strategies, and managing the financial ...

  23. Schools Should Teach Financial Literacy

    Without sounding cliché, financial literacy really does take a village. As parents and families, we should encourage healthy habits like talking about money, budgeting, paying bills on time, and ...

  24. Essay on Financial Literacy

    FAQs Related to Essay on Financial Literacy 1. What is financial literacy? Financial literacy is the ability to understand and use various financial skills, including personal financial management, budgeting, and investing. It's important to have a good understanding of financial literacy to make sound financial decisions. 2.

  25. Importance of Money Management and Financial Literacy for Students

    Published: Aug 14, 2023 Table of contents The goal of this essay is to provide information about the importance of money management for students and how can these be applied in our school system. The data gathered in this paper was taken from various academic articles and journals.