Financial Ability Definition
The term financial ability can have numerous meanings. In banking, it refers to the ability to service a loan, also known as financial capacity. A financial ability definition can also refer to financial literacy, meaning knowledge of financial matters and the ability to make sound financial decisions. A third meaning involves financial inclusion, the access to financial services. Someone who does not have access to financial services does not have financial ability. Taken as a whole, these three meanings offer a complete financial ability definition. In this case, financial ability means having financial literacy, financial capacity and financial inclusion.
Limited Guidance on the Meaning of Financial Ability
A financial ability definition captures an individual’s capacity to follow to a well-structured framework of financial decision making so as to keep on top of financial matters and pay off debts in time. Since this is a less commonly used term than financial literacy, fewer organizations produce their own financial ability definitions to help inform the public of what this term means. Below, we have gathered definitions from some of the few organizations that have released their perspective on what financial wellness means.
Formal Definitions of Financial Ability
“To be financially literate is to have the knowledge, skills, and confidence to make responsible financial decisions that suit our own financial situations.” – Lucie Tedesco, former Commissioner of Financial Consumer Agency of Canada
“Having the knowledge, skills and confidence to make responsible financial decisions” (Canadian Task Force on Financial Literacy). http://publications.gc.ca
“The combination of knowledge, skills, attitudes, and especially behaviours that people need to make sound personal finance decisions, suited to their social and financial circumstances” (United Nations). https://www.un.orgl
“It’s pretty much how we get anything added to the curriculum. When parents said children needed to be computer literate, the schools started responding. The same thing is true of basic financial literacy.” – Elizabeth Warren, United States Senator
“The single biggest difference between financial success and financial failure is how well you manage your money. It’s simple: to master money, you must manage money.” – T. Harv Eker, author of Secrets of the Millionaire Mind
Financial Ability Education Must Include Knowledge and Practice
The few skeptics of financial education’s ability to truly improve the lives of individuals would realize the benefits of financial literacy if they were to survey the academic literature enumerating the advantages of expertise in financial matters. However, these benefits cannot be attained from a program that is focused solely on disseminating knowledge to participants. Financial education programs must communicate to learners the necessity of applying their newly gained knowledge to their own lives.
The Federal Reserve Board’s Division of Consumer and Community Affairs stresses that delivery of information must be presented at an opportune time, when consumers are most likely to retain information. First-time home buyers would be receptive to pre-purchase counseling, for example (US Federal Reserve). https://www.federalreserve.gov
The Consumer Financial Protection Bureau (CFPB) encourages financial literacy initiative to construct a multi-stage project to assess whether there are more potent methods by which to reach low-income and minority communities (ConsumerFinance.gov). https://files.consumerfinance.gov
When Parent’s Lips are Sealed, Financial Ability Comes from Personal Experience
46% of those with low financial literacy index scores reported learning from personal experience, while 73% of those with high literacy scores claimed to learn from personal experience (US Federal Reserve). https://www.federalreserve.gov
Only 23% of kids surveyed indicated that they talk to their parents frequently about money (Money Confident Kids). http://www.moneyconfidentkids.com
58% of 18-26 year olds set aside a portion of their income as savings (Bank of America). https://about.bankofamerica.com
37% of recent college graduates have been late with a student loan payment at least once in the past year (US Financial Capability). http://www.usfinancialcapability.org
More than 20% of renters aged 18-24 overspent their income by $100 per month (Time). http://business.time.com
Capability to Meet Financial Obligations and Stick to the Plan
Financial ability definitions tend to overlap with the definition of other terms such as the meaning of personal finance or financial literacy. The unique thing about some financial ability definitions is that they emphasize the capability of an individual to meet their financial obligations. Such a feat requires dedicated planning and the self-control to follow the budget that individuals have laid out for themselves. Once equipped with the knowledge needed to make intelligent decisions, individuals must also cultivate the willpower and motivation to execute those decisions efficiently.
See also Financial Literacy Definition