What is Financial Literacy? Understanding Debt, Money and Credit

If you’re not entirely comfortable with money or aren’t sure you have all the skills to manage it properly, don’t worry! It’s never too late to add financial skills to your portfolio. 

What is financial literacy?

Financial Literacy 101: Seventeen Years of Promoting Financial Literacy

In 2004, Congress established April as National Financial Literacy Month to highlight its importance and to help teach Americans to establish and maintain healthy financial habits.

The Council for Economic Education, a key sponsor of the initiative, explains that financial illiteracy persists because of the complexity of our global economy.

This also bleeds into personal finances, with members of Generations X, Y and Z struggling to understand or recognize the implications of revolving credit card debt. CreditDonkey notes that they have the highest rate of revolving credit card usage, with 36 to 37 percent of them keeping a balance on their cards every month.

A Wealth of Financial Knowledge

Possessing the ability to manage money is an essential skill to achieve not only economic security but also financial well-being. And yet, financial literacy is not part of many school curriculums, and most Americans struggle to create a budget, save and make healthy financial decisions throughout their lifetime. When you become financially literate, you put yourself in a better position to achieve financial freedom.

While it may seem daunting at first, learning some basic financial planning and money-management skills is the first step toward achieving long-term financial well-being.

Financial Literacy Month is a great time to learn how you can become more money wise. From bank accounts to buying a home, here’s a primer on personal finance and exactly what you need to know: 

  • Make a monthly budget
  • Shop smarter
  • Maximize credit card benefits
  • Improve your credit (and why that’s important)
  • Develop the discipline needed to achieve financial security

Financial Literacy 101: Banking

Based on a 2019 FDIC study, 95% of U.S. households have a bank account. Based on this data, it’s fair to assume you already know the importance of keeping your money in the bank. But, do you know the difference between checking and savings accounts, and how you should use each?

Checking Accounts

A checking account allows you to write checks and use a debit card for purchases. Both leave a paper trail of your spending in a way that using cash does not. This ability to track, manage and analyze your spending is a key part of achieving financial well-being and financial literacy. 

Savings Accounts

A savings account allows you to set money aside for big ticket items, an emergency fund or other short-term savings goals. The money in savings accounts may earn interest and usually does not have check writing or an ATM debit card attached, but can be linked to your checking account for easy transfers in both directions.

Things to Consider When Shopping for a Bank

When shopping for the best bank for your needs, be mindful of fees. Banking fees may include:

  • Overdraft
  • Monthly account maintenance
  • ATM withdrawal 

Search for banks offering a free checking account, ATM fee reimbursement and free transfers from your savings account as overdraft protection. Some banks may also offer a 24-hour grace period for overdrafts, as well as no fees if the overdrawn amount is below a certain threshold. One tenet of financial literacy is not paying fees for basic services that competing banks offer for free. Do your homework and bank smarter. 

Financial Literacy 101: Budgeting

Having a budget means that you know how much money you have coming in and going out each month. Budgeting is essential to reaching your financial goals. If you don’t have a current budget or never tried to make one, Financial Literacy Month is the perfect time to learn how to budget

Open a spreadsheet on your laptop or download the You Need A Budget app on your phone, iPad, Apple Watch or even Alexa-enabled device (such as an Amazon Echo), and start inputting numbers such as your paycheck amount, car payment, etc. 

A successful budget will:

  • Start with how much money you bring home each month.
  • Help you set money aside to save.
  • List all of the fixed bills you need to pay.
  • List all of the variable expenses you incur each month. 
  • Show you how much money you have to spend on fun extras like eating out, going to the movies or the newest streaming service, etc.

Start with Savings

For many people, savings is the last line item on their budget, something possible only if any money is leftover. As you think about the money you have coming in and going out each month, consider making the amount you save a top priority. By putting savings first, you can then adjust your spending accordingly, which may help you rein in discretionary spending. 

Additionally, using an app like Chime can help invigorate your savings by automatically moving spare change from your purchases into a savings account. Also, when you choose to have your paycheck directly deposited into a Chime account, you’ll be able to set up a rule to move a percentage of your pay into your savings on a recurring basis.

Of course, Chime isn’t the only app you might consider. Others include:

All of these tools can help you establish the discipline to save money.

Variable vs. Fixed Expenses

Everyone has a set of fixed monthly expenses, including:

  • Housing costs (mortgage or rent)
  • Utility bills like electricity, water and sewer, home internet (amounts may vary but the frequency is fixed)
  • Cell phones
  • Car payments
  • Loan payments

These expenses tend to be roughly the same amount each month, and should be the first items on your monthly budget after the amount you want to save. 

Variable expenses also include regular costs of living, but unlike fixed expenses, the amounts can vary wildly month to month. These include, but are not limited to:

  • Weekly trips to the grocery store
  • Eating out
  • Entertainment costs (movies, concerts, theater and sporting events)

Variable expenses are often what cause people to break their budget. 

Financial Literacy 101: Good Money Habits

The most financially literate people tend to have good money habits. These are usually small acts that help to not only save money on what you buy but also help you see monetary value in putting in extra work to do things for yourself at home. Examples of good money habits include:

  • Using coupons at the grocery store
  • Buying items only when on sale
  • Searching for cash-back options and online coupon codes before making purchases
  • Making coffee and tea at home, and brown-bagging meals at work
  • Being aware of ways to save money when living on a tight budget

Forming good money habits can be the difference between meeting your monthly financial obligations and overspending. 

A Daily Financial Check-Up

Another good money habit many financially savvy people share is the daily routine of a quick financial check-up. It takes just a few moments to log on to your bank and credit card accounts every day and update the balances in your budget. By paying close attention to your money, you will have all the information you need to make smarter financial decisions.

Living Within Your Means

One example of financial literacy and having good money habits is understanding how to live within your means and why that’s important. In doing so, you will not spend more than you earn.

Financial Literacy 101: Spending Money

From groceries to cars, spending money is a part of everyday life. While spending is not bad, per se, some money is better spent than others. Let’s take a look at how you might be spending money to see the benefits and risks involved.

Credit vs. Debit

The way in which you spend money matters. Using a debit card is a way to ensure that you live within your means because the money comes directly from your checking account. Credit cards, on the other hand, offer spending flexibility and often come with bonuses, but there is risk of accruing debt; therefore, the need for discipline is critical. It’s important to understand the differences, benefits and risks of using credit and debit cards. 

Credit Cards

Credit cards are issued by banks or other financial institutions and work like a personal loan. When you make a purchase using a credit card, the issuing bank is lending you the money to pay for it. Like any other loan, you will be charged interest for the privilege of borrowing money. However, there are ways to use credit wisely to establish a positive credit history and score, and reap additional benefits offered by credit cards while mitigating the risks involved.

Before accepting that credit card offer you received in the mail, it’s important you understand the following credit card terminology:

Credit Limit

This is the maximum amount of credit you can use for purchases at any one time. When approved, you will be assigned a credit limit. This amount can increase over time as you make your credit card payments on time. As you make payments, you free up more of your credit limit to use again for additional purchases.

Grace Period

Most credit card companies offer a grace period for your new purchases. If you pay off your balance on time every month, you won’t be charged interest. If you do carry a balance from month to month, however, you will see interest accrued on your credit card balance. 

Annual Percentage Rate (APR)

When you apply to borrow money through a car loan, mortgage or a credit card, you will see the term annual percentage rate (APR). 

The APR on a credit card refers to the interest applied to your account. Your credit card’s annual percentage rate will likely only be a factor on balances you do not pay off within the grace period (often upward of a month after the closing of a billing cycle). However, APR can also apply to interest on charges or transactions including:

  • Cash advances
  • Balance transfers
  • Late payments

It’s important for you to know how APR works, how it might impact your budget and how good money habits can help you avoid paying credit card interest.

Introductory Interest Rates

Credit cards often offer low or no interest offers to entice new applications. These introductory periods can be beneficial if you’re planning to make a large purchase right away. But, keep in mind that interest is accruing even if you’re not being charged it. This means that if you fail to pay off the card balance in full by the end of the special interest rate offer period, you will be subject to paying the balance under the normal, usually higher, interest rate.


Some credit cards have annual fees. These fees range from $69 to upward of $299 per year and are charged regardless of whether you use the card. Unless you are receiving substantial rewards from the credit card (free checked bags with an airline, complimentary nights at a hotel each year, etc.), you should avoid cards with annual fees. 

Minimum Payments

When your credit card statement period closes each month, you’ll see the total amount due and a minimum payment. To avoid a late fee, you are required to pay at least that minimum amount. However, paying only the minimum payment amount each month could see your credit card balance rise and enter a cycle of debt that may be difficult to escape from.

Credit Card Benefits

For all the risks involved with using credit cards, there can be a number of benefits, such as cashback bonuses, airline miles, gas station rebates and more. To take full advantage of these benefits, you must have the discipline to use credit cards judiciously to avoid interest and living beyond your means.

Using credit cards wisely could have additional benefits for you, including helping you establish a good credit history and credit score, as well as a healthy credit utilization rate (one factor in being approved for future borrowing). 

Credit Card Risks

Credit cards are revolving debt, meaning that when you make purchases using a card, you are borrowing money. As with any loan, you’ll need to pay the money back. Financial literacy is understanding how credit cards work and the risks involved. Financial responsibility, however, is achieved when you live within your means and manage your credit card usage and debt wisely.

Debit Cards

When you use your debit card for purchases or to access cash from an ATM, you are only spending money you already have in your bank account. If you don’t have enough in the checking account attached to your debit card, there are several possible outcomes depending on your bank:

  • The purchase is declined.
  • The purchase is processed with the additional money pulled from your savings (if your bank offers complimentary overdraft protection and your two accounts are linked). 
  • The purchase is processed but your account goes into a negative balance, at which point you will either be charged an overdraft fee or given a certain amount of time to bring your account positive before being charged a fee.

Good Debt vs. Bad Debt

Not all debt is bad. For example, the debt you take on from financing a new car or buying a home are signs of personal growth. And assuming you can afford the payments, both examples of good debt likely have fixed monthly payments and a knowable payoff date. They are also positives on a credit report, as they demonstrate your creditworthiness and credit history. 

Debt accumulated on credit cards and loans from living beyond your means is problematic. This kind of debt compounds due to interest and fees, and can add stress to your life. Achieving financial literacy will help you see the signs of trouble and avoid bad debt situations going forward. 

Credit Score

Your credit score is a 3-digit number representing your financial track record. Ranging from 300 to 850, it allows banks and other financial institutions to quickly determine the risk they undertake in lending you money. Having good credit can help you receive financing — and at a lower interest rate — when buying a car and applying for a mortgage loan.

There are several steps you can start to take today to improve your credit score, including:

  • Monitoring your credit report (apps like Credit Karma allow you to monitor for free)
  • Improving your credit utilization rate by increasing your card limits
  • Paying down your debt
  • Using credit cards less often
  • Consolidating your outstanding high-interest debt
  • Making your payments on time

To further your financial literacy journey, read our in-depth post on improving your credit.

Financial Literacy 101: Investing for Your Future

We’ve already talked about saving for tomorrow’s needs and preparing for the next emergency with a rainy day savings account, but it’s also important to invest for your future. Saving for retirement is essential to reach the point where you no longer need to work. 

You can start saving for retirement at any age by contributing to an employer’s 401(k), if one is offered, and/or an IRA (Individual Retirement Account). Setting money aside for your retirement, typically on a pre-tax basis, can help lower your taxable income in the present and allow you to someday stop working and enjoy your later years without worrying about earning an income. 

Personal Financial Responsibility

While not exclusively a financial literacy topic, exhibiting personal responsibility is a big part of having a healthy relationship with money. It’s up to you to take the necessary steps to spend wisely, make and stick to a budget, and save money to achieve your financial goals throughout your life. 

Financial Literacy Is Within Your Reach

Financial literacy may seem like an unattainable goal, but it is within your reach. By working to understand these topics one at a time over the course of financial literacy month, you can improve your relationship with money and put yourself on a course for financial stability and well-being. 

Read more:


Get the latest news & trends delivered to your inbox.


Get the latest news & trends delivered to your inbox.