What Is Financial Literacy and Why Does it Matter?

A former client once told me, "I earn money, and I spend it." That was the extent of her financial knowledge. She knew she should be doing more with her money, but what? She'd been introduced to the idea of financial literacy when she went to a money-management event themed around winemaking. It was lots of fun, but she learned more about wine than financial concepts. When we met through a friend and she found out I was a financial consultant, she wanted to talk.

My client's story is pretty common. Growing up, her family didn't talk about money in general, let alone things like money management and investing.

She was making a decent salary but didn't understand the basics. Like many young people, she didn't have a roadmap for doing anything but earning and spending. When we started working together, the more my client learned the more she became committed to financial planning and using her money wisely. She took what she learned seriously and put it into action. Now she's on track with her retirement savings, prepared for an emergency, and investing for the future. She's more confident in her financial decisions and living the life she wants. At its core, that's what financial literacy is all about. Now, let's get into the details.

Financial literacy means understanding the basics of money management to help you make better financial choices. It's not so much a course of study as a plan of action. And it doesn't have to be complicated. While some of the financial terms can be confusing at first, once you understand the basic financial concepts—and the steps to take to get started—you'll understand just how easy it could be to get a handle on your money and make better financial decisions.

Financial literacy is important no matter how much money you have. It can help you think about things like living within your means, staying on top of debt, and saving for the future. For instance, overspending is easy to do if you don't know where your money is going. Credit cards are an everyday convenience, but you can easily get in over your head if you don't pay off your bill regularly. Are you prepared if something unexpected happens? Do you have goals for the future, and do you know how to save for them? These ideas are the foundation of financial literacy—and understanding them gives you the foundation for a more secure future.

You can learn about financial literacy online or take a financial education course, but one of the best ways I know of making it real is to start with these seven steps that can help you with everything from debt management to retirement planning. Think of it as financial literacy in action—a way to learn from experience and see the results firsthand.

Start by asking yourself these questions.

• What do you hope to achieve in the next one to two years? Pay down debt? Buy a new car? Take a dream vacation?
• Where do you see yourself in the next three to 10 years? Owning a home? Starting a family? Having your own business and forging a path to entrepreneurship?
• What about in 11 years or more? Think saving for your kids' college or retiring comfortably.

Take it a bit further and write down your goals, attaching a dollar amount to each. That's a start and could be a motivation to keep going.

Does that sound like a budget? Well, you're right. But to me, a spending plan is a more positive way to look at it. Don't just earn and spend like my client was doing. Take the time to focus on how much money is coming in and what's going out. Itemize and add up your monthly expenses, then subtract them from your income. Are you spending mindlessly? Overspending regularly? Then it's time to figure out what you really need, what you want to spend your money on—and where you can make changes. Be sure to make saving for your goals a part of your spending plan.

You never know when you might need some extra money. It could be a major event like job loss or illness, it could be an unexpected car repair. Prepare by aiming to build up enough cash to cover three-to-six months of essential expenses. Keep it somewhere easily accessible like a savings account. And promise yourself you'll only use it when there's an emergency.

Putting money toward savings before you pay other expenses is a great way to make progress toward the goals you set up in the first step. One way to do that for your retirement goal is to contribute to a 401(k) or other company plan to receive the employer match. The money will come out of your paycheck automatically before you have a chance to spend it on anything else. You'll be saving for the future and possibly getting an extra boost from your employer. If you don't have a company plan, open an IRA and set up automatic transfers from your checking account. It's an easy way to save money for your future.

There's good debt and there's bad debt. Student loans or a mortgage fall into the good debt category because they help you achieve something. On the other hand, credit card debt can bring you down with high interest rates, late fees, and a potential ding on your credit score if you make late payments. Make all your debt payments on time, and focus on paying down high-interest, nondeductible credit card balances.

This means having adequate health insurance. Being young and healthy is no guarantee against an accident or unexpected illness, either of which could cost many thousands of dollars. Car insurance is also a must, as well as renter's or homeowner's insurance as appropriate. Yes, it's an expense, but it's also a necessary protection for you, your family, and your money.

Once you have some money saved, put it to work. It doesn't take a lot of money or esoteric knowledge to get started investing. You could easily open an online brokerage account with a low or no minimum balance. Many investors use mutual funds and exchange-traded funds to aim to spread out risk. You may have heard that time in the market—not timing the market—is the key to growing your money. When you're young, time is your most valuable asset, so don't let stock market ups and downs put you off.

Of course, there's always more to learn, but with these steps you'll begin to hone your financial skills and improve your financial well-being. And once you see some positive results from your actions—as my client did—it will be even easier to make financial literacy a natural part of your life. If I were you, I'd start today.