Financial literacy is an understanding of money and financial products that people can apply to financial choices in order to make informed decisions about how to handle their finances. Many individual nations have recognized the importance of financial literacy and created task forces to study their populations with the goal of offering education and outreach. A common place to see classes is in high schools, where students may be offered the opportunity to take some brief courses to prepare them for managing their finances after graduation.
Financial literacy involves a number of different areas of understanding. Learning about money and how it works is an important aspect, as is understanding products like credit, loans, and insurance. The ability to understand and work with interest and exchange rates is also important, with interest being of particular concern since many consumers take advantage of the credit market.
Other topics of interest include understanding risks, learning how to evaluate potential investments, and identifying scams or dubious financial practices. Balancing checkbooks and accounts and being able to read account statements is also an important skill. Financial planning is another key aspect of financial literacy, as it is important for people to recognize how financial planning can help them prepare for life events.
Primers and textbooks that cover the basics of financial literacy are available from many publishers. These texts can be used in organized classes and they may also be read independently by people who are working to improve their financial abilities. Some governments also host educational websites that people can use to take course modules, study with practice exercises, and learn more about how finances work, both on a personal and national level.
Simulation of financial events is often used in classroom settings to help people internalize important concepts in financial literacy. People are presented with hypothetical situations and asked to demonstrate how they would decide and why, as for example when people are asked whether they would take a lump sump payment or a series of smaller payments with interest. If people cannot correctly break down and calculate the problem, they may make a hypothetical choice that would be against their interests if it was made in the real world.
Levels of financial literacy are highly variable. Some surveys suggest that people feel more literate with financial matters than they really are, claiming to understand financial concepts but not demonstrating that understanding on examinations and tests. Identifying areas where a population may be falling short on their understanding of financial topics is an important aspect of developing fiscal policy.
