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What is Financial Literacy?
The goal of our Student Banking Program is to help students become competent and confident in managing money. Meaning we want to help students gain financial literacy. But what is financial literacy? We searched for a definition, and surprisingly, it wasn't easy to find one that was clear and agreed-upon across the board. We found lengthy descriptions or definitions that other people had created for their own purposes, and they were all a little different from one another. But we couldn't find one that was concrete, like what you would expect to find in a dictionary. So we decided to try to make our own. Here's what we came up with.
There are three components to financial literacy: Competence, Finance (obviously), and Skill.
Let's break it down. What does it mean to be competent? Competence is defined as "having sufficient knowledge, judgment, skill, or strength." Pay special attention to the mention of "skill" here. This will be important later on.
What is finance? This is the obvious one, but it's still worth defining. One definition of finance we found was this: "Money or other liquid resources of a government, business, group, or individual." That's true, but it's a little too vague for our purpose. A more practical way to define finance is "the system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities."
Moving on to "skill." Skill is "the ability to use one's knowledge effectively and readily in execution or performance." Here's an easy example: to develop basketball skills, you first need to have knowledge of the game, meaning you understand the rules and how to play. Once you have that knowledge, then you practice different parts of the game. Knowledge, combined with practice, will lead to skill. Knowledge + Practice = Skill. But this begs a follow-up question. How do you know if you can use your knowledge effectively? How do you know if you're skilled? For that, we need to look at the word "effective."
"Effective" means "producing a decided, decisive, or desired effect." You need a goal to test your skills against. If you achieve the goal, you know you can use your knowledge effectively. If you fall short of the goal, then you still have work to do before you become skilled. Using the basketball example again, if you get the ball into the hoop, then you know you're at least somewhat skilled in basketball. If not, then you need more knowledge, more practice, or maybe both.
Let's review our definitions so far and refine them.
Competence - to have sufficient knowledge
Finance - the system of money, credit, investments, and banking
Skill - the ability to use knowledge effectively
When we combine all three components and their definitions, we arrive at a clear, concise definition of financial literacy.
Financial literacy is the quality or state of having sufficient knowledge of money, credit, investments, and banking to apply effectively to achieve your goals. To put it plainly, being financially literate means having enough financial knowledge and the ability to skillfully apply it to achieve your goals.
Ultimately, financial literacy looks different for everyone. It's a spectrum. Whether someone is considered financially literate depends entirely on their goal. That's why setting goals, specific goals, for how you want to use your money is so important. Your goals will determine which areas of financial literacy you need to learn more about and how deeply you need to understand them. Sometimes, just understanding the basics is enough. Sometimes, you'll need to know more. It all depends on where you're at in your financial literacy journey and the goal you're trying to achieve.
Start your financial literacy journey today with Banzai! A free resource focused on making financial and life literacy education accessible for all. Citizens Federal is proud to offer this exciting free resource to our customers and community.
Get started with Banzai today!