Budgeting What Is Financial Literacy? Financial Literacy Explained in Less Than 3 Minutes By Christine DiGangi Christine DiGangi Twitter Christine DiGangi is an expert in a wide range of consumer finance topics, including student loans, mortgages, credit cards, credit scores, and credit reports. She has been a journalist for more than a decade and dedicated the majority of her career to financial education, writing thousands of articles about the consumer credit system and how to manage personal finances. learn about our editorial policies Updated on November 21, 2021 Reviewed by Doretha Clemon Reviewed by Doretha Clemon Doretha Clemons, Ph.D., MBA, PMP, has been a corporate IT executive and professor for 34 years. She is an adjunct professor at Connecticut State Colleges & Universities, Maryville University, and Indiana Wesleyan University. She is a Real Estate Investor and principal at Bruised Reed Housing Real Estate Trust, and a State of Connecticut Home Improvement License holder. learn about our financial review board Fact checked by Emily Ernsberger Fact checked by Emily Ernsberger Twitter Emily Ernsberger is a fact-checker and award-winning former newspaper reporter with experience covering local government and court cases. She also served as an editor for a weekly print publication. Her stint as a legal assistant at a law firm equipped her to track down legal, policy and financial information. learn about our editorial policies In This Article View All In This Article Financial Literacy Definition and Examples How Financial Literacy Works Notable Happenings Photo: Sally Anscombe / Getty Images Definition Financial literacy is the ability to understand the products and concepts you need to manage your money. Financial Literacy Definition and Examples Financial literacy refers to myriad skills you might call on when making a choice about what to do with your money. Some of them are basic—like how to add and subtract the money you earn, spend, and save—while others involve a complex combination of calculations and risk assessment. For example, a financially literate person knows that if they take home $2,000 a month in pay, they cannot spend more than $2,000 each month without going into debt. Someone with a higher level of financial literacy may know that they should save some of that $2,000 for the future. Someone with even more financial literacy might be familiar with the 80/20 budgeting rule (spend 80%, save 20% of your income) and aim to set aside $400 of the $2,000 they have coming in each month. One person might choose to put all $400 in a high-yield savings account, and another might choose to use that $400 to buy stock. Both are financially literate choices, depending on each person’s goals, understanding of those products, and risk tolerance. How Financial Literacy Works Because financial literacy begins with your first interactions with money, it is a lifelong journey—one that inevitably has good and bad moments. While you can develop financial literacy by consuming educational content about personal finance, you will also gain it through real experiences. Financial literacy is the ability to understand the pros and cons of a money decision, weigh the costs, and confidently decide what to do. But being financially literate doesn’t mean you know everything about money; rather, it equips you to seek out the answers you need in order to make a good financial decision. Here are some questions financially literate people often ask themselves when faced with a money decision: How much will this cost?How do the short-term and long-term costs of this choice compare?What are the rules that apply to this choice? For example, if I miss a payment, will I have to pay a fee?If I use my money for this, what will I have to give up? What will I gain?If this is a risky decision, can I afford to lose this money? A financially literate person also understands how common personal finance products work, like checking accounts and credit cards, as well as how costs like interest and fees are calculated. Some of the core concepts of personal finance include understanding how credit works, how to budget, and how to invest. Notable Happenings In the U.S., April is Financial Literacy Month, or National Financial Capability Month. The dedicated month gained traction in the early 2000s when the National Endowment for Financial Education (NEFE) began promoting April as Financial Literacy for Youth Month. Over the years, federal and state governments have reinforced April as Financial Literacy Month through a series of declarations and proclamations. Key Takeaways Financial literacy means you have the ability to weigh the pros and cons of a money decision and confidently choose what to do.Being financially literate doesn’t mean you know everything about money, but you do know what questions to ask to make an informed decision.In the U.S., April is Financial Literacy Month, during which a number of governments, schools, and other organizations develop and promote programming designed to help people learn more about how to manage their money. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. My Credit Union. "National Financial Capability Month 2021." Accessed Oct. 18, 2021. Jumpstart. "April Is Financial Literacy Month." Accessed Oct. 18, 2021.