What Is Financial Literacy & Why Is It Important?
Let's talk about the 'F' word that many people tend to avoid: finances.
If you were raised to think that talking about money is taboo, you’re not alone: 62% of people don’t talk about money—not with their family (63%), not with their friends (75%), and not even with their spouse or partner (46%).
That leaves a good number of us left in the dark about our finances and being ill-prepared to hit milestones and engage in activities like budgeting, retirement, investing, managing debt, and more. And beyond affecting the numbers in your bank account, avoiding money conversations can have a lasting negative impact on our own money attitudes, relationships, and life goals.
Ultimately, demystifying the money talk taboo, learning about financial literacy through an inclusive lens, and improving our financial acumen will help us learn, grow, and better prepare for our future.
Defining Financial Literacy
At its core, the concept of financial literacy isn’t overly complicated. It’s the “ability to understand and effectively use various financial skills” (think: personal financial management, budgeting, and investing) to make the right decisions toward achieving your financial goals.
Laying the foundation of your relationship with money, financial literacy is a lifelong journey. That said, education is the key to success when it comes to money.
The more knowledgeable you are, the greater your ability to make informed decisions, which is crucial for financial health, monetary stability, less stress, and overall higher quality of life.
The Importance of Financial Literacy
No one expects you to become a financial expert, and being in good financial health isn't synonymous with being rich or the be-all-end-all against financial challenges.
The important thing when it comes to financial literacy is knowing enough to feel confident to make proper decisions for your particular situation and being able to ask the right questions.
Learning how to make your money work for you is a learned skill and for many great reasons, such as:
1. Empowerment
Financial literacy empowers individuals to take control of their financial future. It equips them with the knowledge and skills necessary to make informed decisions about money, reducing their reliance on others and enabling them to build their wealth.
2. Economic stability
On a broader scale, a financially literate population contributes to economic stability. People who understand their finances are less likely to engage in risky financial behaviours, which can compound and lead to economic crises.
3. Mental health and Confidence
Around 40% of Canadians are struggling financially. Back to the money taboo we talked about initially, many of those individuals are reluctant to seek advice or talk about money with a professional.
Stress and anxiety over money will often creep into other areas of life too. Imagine making a life-changing decision without all the information you need to make the best choice—stressful, right? By fully understanding and being knowledgeable about financial options, individuals can approach major life choices with greater confidence and are less likely to be surprised or negatively impacted by unforeseen outcomes.
4. Reducing vulnerability
Financial literacy helps individuals make better choices about borrowing, spending, and saving, reducing vulnerability to financial scams, predatory lending, and other financial pitfalls.
5. Wealth building
For women and underrepresented communities, financial literacy is a powerful tool for closing the wealth gap. By understanding investment opportunities and building assets, they can create long-term financial security.
Financial Literacy, Inclusivity, and Gender Diversity
Speaking of women and wealth building…
In a paper that drew on two women and their experience teaching personal finance, Annamaria Lusardi and Olivia Mitchell measured financial literacy by asking three simple questions that tested basic and fundamental economic decision making. Some findings were:
Only 43% of the respondents were able to answer all of the questions correctly
29% of women answered all three questions correctly, versus 48% of men
Women were much more likely than men to respond that they do not know/refuse to answer at least one financial literacy question
Why are those last two points especially important? Such gender differences are likely to be the result of lack of self-confidence, in addition to lack of knowledge.
Financial literacy must be inclusive and consider gender diversity to truly be effective. Here's why:
1. Gender pay gap
We’re all aware of the frustrating truth: women still earn 17% less than men on average, at 82 cents for every dollar a man makes.
Financial literacy can help women navigate this disparity by teaching them negotiation skills, investment strategies, and ways to maximize their earnings.
2. Women's unique financial challenges
Women often have unique financial challenges, (see: reduced earning potential, career breaks for caregiving, compensating for longer life expectancies, lack of inclusive hiring policies, preconceived biases… the list goes on).
Financial literacy programs should address these issues and offer solutions tailored to women’s needs.
3. Representation
Promoting diversity in the financial industry is vital. Encouraging more women and underrepresented groups to pursue careers in finance can lead to more inclusive and relevant financial services and products.
Not to mention opening up more conversations about money from diverse perspectives and experiences, breaking the money taboo.
Recall in our ‘How Investing in Education Could Activate the Trillion-Dollar Female Economy’ blog: if women invested at the same rate as men, there could be more than $3.22 trillion of additional capital to invest globally.
But unless we start at the baseline to increase financial literacy, how are we supposed to get there? Knowledge is power when it comes to money management—from day-to-day expenses to investing to retirement planning and everything in between.
As a universal life skill with resounding implications for individuals and society, approaching financial literacy through an inclusive and gender-diverse lens becomes a powerful tool for closing financial disparities, empowering women and marginalized groups, and promoting economic stability.
By embracing the principles of inclusivity and diversity, we can create a world where everyone has the knowledge and skills to make the most of their financial potential—regardless of their background.
Explore our programs and let us know how you’re upskilling your financial acumen or what you'd like to learn in future offerings.
*Please note that the information provided in this blog is for informational purposes only and should not be construed as investment or financial advice.
