Definition: Financial literacy is the education and understanding of knowing how money is made, spent, and saved, as well as the skills and ability to use financial resources to make decisions. These decisions include how to generate, invest, spend, and save money.
What Does Financial Literacy Mean?
What is the definition of financial literacy? This concept is applicable to both individuals and organizations. Individuals must be able to balance a checkbook, comprehend personal income taxes, and understand the concept of budgeting in order to make wise decisions with money. These skills are vitally important; yet, many individuals lack this basic knowledge and consequently are unable to meet their daily expenses.
Businesses, on the other hand, must have management who understands financial statements, production schedules, costs sheets, and many other types of reports in order to make decisions about the future of the company.
Example
Caroline earns $200 per month in income. Her monthly expenses including utilities and household bills are around $100. From the remaining $100, she pays $50 for her monthly gym subscription that offers numerous services, which are not entirely utilized by her. She also uses the remaining $50 left over to buy luxurious items including brand name clothing. This means that at the end of the month she is left with no saving for any unforeseen liabilities, which she might incur.
By having a short-term view, her finance management appears to be perfect as she is able to meet all of her daily expenses and wants; however, in long-term this is clearly inappropriate, as she has no savings for the future. This means her income will always be fixed at $100 and she will never have options to spend more than she currently does unless she decides to switch to a job with higher income.
If she learns how to manage her finances better, she would be able to buy the items that she needs and save enough money for a rainy day.
Although Caroline might be off to a good start by learning how to budget, she can’t be considered financially literate. In order to be truly literate, you must understand financial concepts like the time value of money, compound interest, and debt management. By understanding these concepts, you should be able to make wise personal finance and business decisions regarding investments, real estate, college loans, retirement, and insurance.
Summary Definition
Define Financial Literacy: Financial literacy means the ability to understand how money works in a business and in personal life.
