What is Financial Literacy?

Updated: Sep 27, 2021

Financial literacy is having the knowledge and understanding of financial principles to manage money in a wise, and effective manner.

There are essentially two parts to financial literacy: knowing how to manage money, and actually doing it.

Anybody can learn the principles of money management. But to become truly financially literate, you need to take it one step further and have good financial principles in your own life.


Why Is It Important?

Financial Literacy is important because, without a proper understanding of personal finance and the skills necessary to manage money effectively, financial success becomes extremely hard to reach. Meanwhile, the likelihood of someone experiencing financial struggle begins to increase.

Plus, money is easy to mismanage because it only takes a few decisions to wreck your financial future. However, if you take the time to learn how to properly manage your money and then apply that knowledge to your financial life, you will build wealth over time.

According to research by the Financial Conduct Authority, the UK scores poorly for financial literacy. Half the population have low confidence in making decisions to do with money. Numerous studies have linked high levels of economic deprivation with low levels of financial understanding. Groups include those on low incomes, young people, women and ethnic minorities.

And it’s clear young people are losing out from a lack of teaching on financial education at school. Another survey from the Financial Conduct Authority revealed that 18‑24-year olds rate themselves as the least confident and knowledgeable of all UK adults about managing money and financial matters.

One of the reasons I wanted to write at Pennies to Pounds was because I believe we should all be taught financial literacy, or at least have the chance to understand our money habits.

Therefore here are a couple of tips to fuel your financial literacy:

Take advantage of free learning opportunities:

There is an increasing number of resources that can take you a long way on your journey. Podcasts, newsletters and books can be great ways to boost your financial literacy knowledge. There are also a number of accounts such as ours on Instagram that enables you to up your financial knowledge. Create a budget to monitor your progress, or download an app that can help scrutinize your spending decisions.

Education will always be key:

There are different pillars of financial literacy at different stages of life. Your need for knowledge will evolve over time as your needs and goals change. Financial literacy begins with the basics of budgeting, credit building and saving. As you get older, it will include investing, insurance, taxes and potentially housing.

Trust someone else, but always stay in the driver’s seat:

Never fully give up the responsibility for your finances. While it’s OK if your partner or investment manager handles the nuances of managing the money, you still need to have a supervisory role with knowledge of what’s happening.

Instil good habits:

Finally, if you have kids, make personal finances part of their learning routine, too. Whether that’s sitting down to talk about the basics of investing or using a family holiday to highlight the power of goal-setting, it’s never too early to put financial literacy on the at-home curriculum.


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