Experts Define Financial Literacy

Although the term financial literacy has been defined in various ways, all those variants seem to contain similar components. Financial literacy basically means knowing how money works in the world. And on a deeper level, the phrase refers to a skill set that allows people to make good decisions about how to use the money they have. That’s why the experts at the National Financial Educators Council define financial literacy as “possessing the skills and knowledge on financial matters to confidently take effective action that best fulfills an individual’s personal, family and global community goals.”

There are two major differences in the NFEC definition of financial literacy compared to those put forth by other organizations. First, this expert group includes a psychological component in the definition. That is, they believe people develop personal, emotional relationships with money. For many individuals it becomes difficult to separate their decisions from these emotional ties. Becoming financially literate, then, requires people to recognize and distance themselves from the strong emotions that come up when an important financial decision must be made.

The second difference in the NFEC’s financial literacy definition is that they view the concept as encompassing far more than just an individual’s personal finances. The inclusion of the phrase “global community goals” in the definition implies that promoting financial literacy at the individual level will have broader impact on the local, national, and global economies as well. This belief has led the NFEC to include lessons in its financial literacy education programs that address social enterprise and community service—teaching people to pay forward what they’ve learned is how the financial literacy message achieves the widest possible impact.

Another essential message to take away from the NFEC’s financial literacy definition is the sense that this knowledge and skill set must continually evolve in order to remain effective. The economic environment is in constant flux, and therefore financial education programs must shift and adapt to keep pace.