For many people, finance terms sound like a foreign language. But if you don't understand the basics of managing money and the lingo used to talk about it, it could be tricky to reach financial goals like paying off debt, buying a home, or saving for retirement. The good news is that you don't have to be a Wall Street pro to hit these targets. Mastering a few basic financial literacy concepts could help you get there.
What is financial literacy?
Financial literacy is a person's understanding of money topics. Someone who's financially literate would be able to set a budget, manage a bank account, and achieve a good credit score. Financial literacy could also include more complex skills like managing debt, buying insurance, investing, and retirement planning.
The more familiar you are with these topics, the higher your financial literacy. If you're not sure how your financial knowledge stacks up, you could test your knowledge using free online quizzes from reputable financial organizations or universities to measure your overall understanding of money matters.
Why is financial literacy important?
Financial literacy is important because you make financial decisions every single day. Being financially literate could help you make better money choices and avoid costly missteps. For example, someone who doesn't understand how credit card interest rates work might not realize how expensive it is to carry an unpaid balance, so they fall into debt—though having high expenses and low income is another common reason. Because many parents don't discuss money with their children, unless you brush up on financial literacy fundamentals, you could be at risk of repeating any money mistakes your family made.
Financial literacy is especially important when it comes to retirement. In the past, many workplaces offered pension plans to cover employees' cost of living when they stopped working. Now, you likely need to pay for retirement by yourself, using savings from an individual retirement account (IRA) or employer-sponsored plan, like a 401(k). But if you don't know how to harness the power of these saving vehicles, you might not have enough money in retirement. That's why it pays to be financially literate and understand the different accounts that could be available to you.
Financial literacy statistics
Understanding money is the first step to managing it well, yet only 64% of Americans received a passing grade on a basic financial literacy quiz from S&P Global.1 This lack of knowledge cost the average American $1,506 in 2023, according to a survey from the National Financial Educators Council.2 And it can have a costly impact on day-to-day life too.
- 60% of US adults live paycheck to paycheck, including more than 40% who make 6 figures, according to LendingClub.3
- 36% of Americans have more credit card debt than emergency savings, according to a Bankrate survey.4
- And 33% of Americans have no savings at all, according to a survey by Ramsey Solutions.5
The flipside is that when people have more financial literacy, they do better with saving money, avoiding debt, and planning for long-term goals like retirement.
Because of financial literacy's impact, many states are requiring high schools to offer personal finance classes, with some even making it a graduation requirement. In fact, Fidelity has helped develop curriculum for high schools across the country.
Personal financial literacy basics
Improving your financial outlook could start with understanding some key topics and bringing that knowledge into your day-to-day money management practices. Here's some of what you need to know.
Bank accounts
A bank account gives you a place to save your money, pay bills, and deposit checks. The type of account you use—checking, savings, or money market, for example—will depend on whether you plan to access your cash daily, save it for an emergency, or grow it over time. And there may be other options.
Of the millions of bank accountholders, many might not understand how their accounts work, especially what banks might charge them. These could include fees for not keeping a large enough balance, overdrafting (or spending more cash than is available), or using out-of-network ATMs. Others offer low- or no-fee accounts, often tied to regular direct deposits of paychecks, or higher annual percentage yields (APY), which is a yearly return on the money you put in.
A budget
A budget tracks how much money you have coming in, as well as how much you spend and how you spend it. By understanding where your money goes, you might find ways to cut costs and save more. A good budgeter makes sure to never spend more than they bring home. Here are 7 steps to learn how to budget. Want a personalized budget you don't have to make yourself? Fidelity's Budgeting Tool helps develop one for you. Plug in your income, and in seconds you'll get a budgeting framework based on national average estimates you can easily tweak to fit your actual spending habits. To get more specific suggestions, you can connect your bank accounts.
Emergency savings
You never know when you might need money because of losing your job, surprise car repairs, or medical bills. Start by setting aside $1,000 or 1 month's worth of essential expenses. Then aim to build up 3 to 6 months' worth of expenses in your emergency savings account.
Credit cards and debt management
Credit cards can be a valuable tool if you use them wisely. But credit cards are loans—and they could get you in trouble if you run up balances without paying them off before you get charged interest. Be sure to read the terms and conditions that come with each card so you understand how it works, including the APR interest rate, the payment deadlines, rewards, and penalties, like for missing a minimum monthly payment or spending past your limit. These 7 credit card tips could also help.
If you have other loans, like a mortgage or student loan, they'll also have a specific set of guidelines, interest rates, and deadlines that will determine how you'll pay them off.
Once a year, check your credit report as well. This report shows how well you've been managing debt and may include a credit score, which sums up in a 3-digit number how reliable you are with paying back debts on time. A higher score makes qualifying for future loans and credit cards easier and could potentially get you better interest rates on mortgages, car loans, and other loans.
A financial plan with goals
Financial planning is creating a comprehensive plan to help reach your financial goals. By considering your whole financial life, it provides guidance on reaching both, short-term targets as well as larger, long-term ones, like retirement, buying a new house, saving for college, and/or donating to charity. With this plan, you can determine how much you may need to save annually as well as how to invest appropriately to hit these various goals.
Investment and retirement accounts
While saving money in the bank is a good start, investments like stocks, bonds, mutual funds, and exchange-traded funds (ETFs) could potentially grow your nest egg even more. To maximize your financial literacy, aim to understand how each one works (just click the links for explainers), as well as the different rules for retirement accounts like an IRA and 401(k).
Insurance
Insurance helps protects you, your family, and your most valuable belongings (and could keep you from having to pay out of pocket) in case of an accident, illness, or death. Some insurance types to consider are life, disability, health, home, and auto. Consider having enough coverage to protect your family in the event of loss, and discuss the details of your policies with your provider so you know how they work before you need to file a claim.
How can you increase your financial literacy?
You can increase your personal financial literacy with a bit of studying. It won't happen overnight, but it's also much less complicated than it may seem initially. Here are some ways to wise up.
Fidelity's Learning Center
Get the basics all in one place through articles from Fidelity you could read at your own pace. Many are written for newbies, so they're easy to understand. Some good sections to start with: Saving and budgeting money, Managing debt, and Investing for beginners. Or you could have financial literacy basics come to your inbox with the Smart Money newsletter.
Courses
A personal finance course could help boost your financial literacy. A community college may offer one in your area, but there are also online courses covering financial literacy for beginners. Some cost a pretty penny; others are free.
Books and professionals
There are countless books on personal finance. You could consider checking out a variety of them to get different perspectives on how to manage your money at different stages.
Financial planning seminars
Local financial planners and investment firms regularly host free events on topics like insurance, investing, and retirement planning. They do so in hopes of recruiting new clients, but you could attend just to learn more. Your employer may also offer seminars to explain employee benefits like health insurance and a 401(k)—consider taking advantage. Here's another way to learn insurance basics and other ideas for crisis-proofing your life.
A financial advisor
For more hands-on guidance, you could work directly with a financial advisor. They will walk you through how to put a financial plan together and answer any of your questions.
When it comes to finance, a little knowledge goes a long way. But don't just take any social media star's word for it. Stick with well-established companies and credentialed financial pros instead.