8 Components of Financial Literacy & 3 Resources to Help You Get it

By Chika


Last Updated: March 9, 2023


Learning how to manage your money is a life skill, and this is why it is important to build your financial literacy.

With the vast array of books, blogs, podcasts, and more accessible today for free, it is easy to gain financial literacy. However, according to a poll carried out by Ipsos, about 66% of the American population is considered financially illiterate.

Most people stop at the basic elements of gaining financial literacy.

We at best, know how to budget or save.

However, other aspects such as taxation, reading financial statements or even making the right investment choices tend to elude us. We feel we need to be smart to be able to know these things. 

Being financially literate allows an individual to be better prepared for specific financial roadblocks, which, in turn, decreases the chances of personal economic distress.

In this style, we take a look at the components of financial literacy to help you know which areas you can improve your financial education and money management skills. 



What is financial literacy?

Financial literacy is the ability to understand money issues and handle them well.

It means having the knowledge, skills, and confidence to make smart decisions about money, such as:

Financial literacy also means knowing about:



8 Components of financial literacy

Financial literacy consists of several financial components and skills that allow an individual to gain knowledge regarding the effective management of money and debt. These are the fundamental components of financial literacy that should be learned.


1. Understanding financial statements.

Understanding how to read a company's financial statements is a key skill for any investor that intends to make smart investment choices.

Financial statements tell you:

  • the financial standing of the company
  • how it makes money
  • the amount of debt the company uses to fund its operations
  • how liquid the company is

Understanding how to read financial statements is part of fundamental analysis. This would help you to sift high quality investment from the low quality. 


2. Budgeting and money management.

Knowing how to budget and manage your money is the cornerstone of financial literacy. In reality, a budget should be designed in such a way that you can afford to pay off all existing debts while reserving funds for savings and investment.

Creating a budget helps you optimize the use of your money in 5 different ways:

  • purchasing
  • investing
  • saving
  • reducing debt
  • donating

Striking a balance between these purposes enables individuals to allocate their income more effectively, resulting in financial security and prosperity.

Want to learn how to make a budget? Read our article next - Budgeting 101 - What Are The Basics of Budgeting You Should Know?


3. Investing.

Understanding the fundamentals of investing is a core component of financial literacy.

It enables individuals to make prudent financial decisions that may increase their income.

  • interest rates
  • price levels
  • diversification
  • risk mitigation
  • indexes

These are a few of the components that must be learned to ensure profitable investments.


4. Financial planning.

Developing a plan to meet your long-term financial goals is an important part of financial literacy.

A good financial plan keeps you focused and on track as the finances grow, when new challenges arise, and when unexpected crises hit.

The feasibility of a financial plan is dependent on how well you know the other components. For example, if you want to be debt free at a certain age, you need to understand debt management strategies.

Or if you want to increase your net worth, you need to know how to invest, save, budget, and reduce debt. 


5. Risk management.

Knowing how to identify and manage risk is essential if you intend to grow and protect your investments.

Risk management lets you know:

  • when you should take the plunge
  • how big a risk you should take
  • when to stay on the sidelines

Making money and growing your finances is one thing, knowing how to keep and protect it is another.

Recognize that growing your finances is a long-term goal and to get there you need to be able to balance risk with potential rewards. 


6. Retirement planning.

Creating a retirement plan is essential for a prosperous financial future.

It helps you ensure that you have enough financial resources to support your lifestyle in your golden years. 

Retirement planning also helps you to put your present financial life in perspective, and guard against frivolous financial behaviors which could hurt you in the future when you are no longer able to work. 

One key aspect of retirement planning is knowing how inflation erodes the value of your retirement account. As such, when planning for retirement, make adjustments for inflation. 

If you don't have a retirement plan yet, read our article next - Retirement Planning: The Top 5 Things You Should Know About


7. Tax planning.

For financial literacy, it's important to learn about the different types of taxation and how they affect your net income.

Every source of income is taxed differently, whether it comes from a job, an investment, a rental, an inheritance, or something else. Understanding how taxation works, including the different interest rates and strategies for reducing taxes improves your finances in the long run. 


8. Debt management.

In most cases, almost every individual is required to borrow money at one point in their life.

This may be through:

  • credit cards
  • mortgages
  • auto loans

Understanding how to use credit and manage debt is a very crucial aspect of financial literacy.

If managed effectively, debt can be used to build up your net worth and assets. On the flip side, it could also put you in a financial hole.

To be able to manage debt effectively, you need to have an understanding of:

  • interest rates
  • compound interest
  • time value of money
  • payment periods
  • loan structure



3 Resources to Gain Financial Literacy

Though there are a lot of resources that provide financial education, not everyone is worth your time.

It's a benefit to you to select a credible source - or sources - for financial education. 

Here are some places where you can begin your financial literacy journey.


1. Books.

Books have always been the everlasting source of knowledge.

Reading finance books helps you to learn from the experience of others. It gives you an insight into how the mind of financially astute people works and how you can adapt the princess to your life. Books on investing, and trading lifestyles of great investors are a good choice for you. 


2. Online resources.

No doubt there is an explosion of videos online claiming to offer financial education. The sad reality is many of them are not helpful or credible and don't offer tangible advice. 

Rather, they pander to your emotions by focusing on trendy topics which do not add value to your life as a long-term investor. Albeit there are still good resources that offer credible advice. Any platform that offers financial advice as a get-rich-quick scheme is not credible. 


3. Financial experts.

You can always go to experts for financial advice when in doubt.

They can offer insightful ways of managing your money. However, like online resources, you should always conduct a background check on the individual regardless of if they are highly recommended by someone you trust.

Check out this article next: Advisor, Planner, Coach or Consultant - What's the Difference in Financial Support People?

Photo by Liza Summer


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