Five Essential Elements of Financial Literacy

Five Essential Elements of Financial Literacy
Skilledwise 17 Mar 2022

Financial literacy is the ability to make wise financial decisions, and it's something every adult needs. Even if you can't plan for every eventuality, you can arm yourself with the knowledge you need to deal with the ones you can.

Opening the correct kinds of bank accounts, saving for retirement, and paying off personal debt from student loans or credit cards can all be difficult when you don't have the financial means to do so. One of the most important things a person can do to secure long-term financial security is to acquire financial literacy.

Financial Literacy: Why a must?

  • Around 78% of Americans are thought to be living paycheck to paycheck.
  • Over 189 million people in the United States have a credit card.
  • The average number of credit cards held by an individual is around four.
  • More than 44 million borrowers have student loan debt totaling $1.5 trillion.
  • At $1.04 trillion, consumer credit card debt is at an all-time high.
  • The total national debt of the United States is estimated at $12.58 trillion.

Five key components of financial literacy:

To be financially literate, one must know how to earn, spend, save, borrow and protect according to the Financial Literacy and Education Commission.


The first step in managing your money is figuring out how much you make. This is a simple task if you make the same amount each month. Identify your gross and net income, as well as any additional deductions, such as employer-sponsored health insurance or a retirement plan, on your pay stub.


When it comes to reaching your financial goals, a personal budget is the most important tool you have at your disposal. Once you've tracked your expenditure for a month, you'll need to split it down into other categories to build a monthly personal budget. If you want to get specific about your spending, you might want to use a rule like the well-known 50-30-20 rule.


Everyone understands the need of saving money, but it can be difficult to live within your means without a clear sense of financial direction. Depending on your situation, your financial goals should include:

  • Putting money aside for a rainy day
  • Preparing for one's post-work life
  • Preparing for a large purchase by saving
  • Debt relief for the individual


A significant expense like a home or a car may need borrowing money, even if you're a meticulous saver. You may have taken out student loans or credit card debt when you were in college. As long as you know how to evaluate loans and keep a decent credit score, borrowing isn't necessarily a negative thing.


Maintaining a vigilant eye on your bank accounts and credit cards, as well as securing your passwords and documentation, is essential to preventing fraud and identity theft.

Financial Literacy: How to Measure Yours

Asking yourself a few questions about your money is a simple method to gauge your level of financial literacy.

  • How well do you know how to set up a budget for yourself?
  • Have you set aside three months' worth of essential living expenses in case of an emergency?
  • Do you have a retirement strategy in place?
  • What is your strategy for paying off your debts?

Steps to increase your financial literacy:


Don't worry if you responded no to some or all of the questions above. It's never too late to start taking charge of your money and gaining a better understanding of them.

Create a monthly budget for yourself

The basis of your financial well-being is your budget, and it's simple to get started. A personal budgeting guide is available here.

Invest in an emergency fund

If you lose your job or face a hefty medical bill, experts recommend saving at least three months' worth of essential living expenditures.

Plan ahead for your golden years

Retirement accounts share the simplest ways to begin investing.

Be proactive in paying off your debts

You may save thousands of dollars in interest by establishing a plan to pay off your debt.

Financial literacy is attained through financial education; hence, students learn how to apply their knowledge and abilities to handle their money successfully for the rest of their lives.