What is financial literacy, and why is it important for all people to build these skills?

In its broadest form, financial literacy refers to having the knowledge and skills to make good financial choices. Yet, the choices we face are becoming increasingly more complex in today’s shifting climate of social and economic change.

For example, for our younger generations, enrolling in college often means taking on debt before deciding on a career and saving for retirement entails more of an understanding of long-term investment risks. Although these changes have been happening gradually over the past 30 years, the COVID-19 pandemic reminds us that the choices we make, and the finances we have available, are dynamic. And so, it may be more helpful to think of financial literacy as an ongoing learning process to understand the options available to us and what is important to us so we can make more informed choices.



Q: For people looking to start building their understanding of their personal finances, where should they start?

Newsletter signup for email alerts

A good way to approach strengthening your financial fitness is from a financial decision-making perspective:

  1. Start with a goal you want to achieve or a specific problem you want to resolve. Focusing on something of value to you provides the motivation to learn something new. It’s always a good idea to start out with something smaller to help you gain confidence in your ability and the process.

  2. Follow up with self-directed learning. This gives you some idea of available options and potential challenges. Seek out information about the goal or problem from a variety of sources, including journals and newspapers, people who have achieved what you want to do, and reputable online resources (avoid social media crowd-sourcing).

  3. Sort through what you have learned about your choices and outline the steps you are going to take. This may lead to revising your goal or more clearly defining the problem. If you still have questions, consider attending a class or seminar to learn more about the topic. Be open to seeking advice or guidance, by meeting with a financial counselor, coach, or other financial services professional.



Q: What are the key things people should consider when developing their financial skills?

It’s important to distinguish between the need to learn more about a topic versus how to develop the self-discipline to take action. There are several resources readily available to help with learning, including several provided for free to Minnesotans through University of Minnesota Extension.

Although there are many self-help articles and books on how to develop financial self-discipline, many people find it more effective to work directly with someone, whether a financial coach or a trusted friend or family member, to provide ongoing support and encouragement.



Q: How can caring adults prepare children and young adults to develop financial literacy skills?

Although the foundation for financial literacy begins early in life, it isn’t until late adolescence that young people begin to understand that good financial decision making is not so much about choosing the right action but rather about choosing the most appropriate action in the current situation. To help youth learn and develop the skills to make better financial decisions, see yourself as a mentor or coach and provide opportunities for self-discovery and self-reflection.

For young children, engage them in everyday family inter­actions that include financial choices, such as paying bills, grocery shopping or making bank deposits. As young people mature, provide opportunities for them to understand the uses of money beyond “buying stuff” by encouraging them to make choices in line with their values and goals (e.g., swimming lessons or soccer camp). Be sure to maintain dialogue about age-appropriate and relevant topics.

When people understand how money works, they can make more informed choices about saving and spending their money. Discussions about budgeting or responsible credit use may motivate college students to perform those behaviors while at school, whereas discussions about charitable donations and saving with younger children may foster values about caring for others. When someone understands how money works, they can make more informed choices about saving and spending money on their own.

Lastly, allow them to make mistakes. Recovering from mistakes provides a powerful motivation for strengthening financial literacy skills.



Q: What does your research in this space show?

The research, both my own and that of many other researchers, clearly shows that the foundation for financial literacy begins in early childhood. By observing our parents and other influential people in our lives, we learn about using money in the context of everyday family life (e.g., paying bills, grocery shopping) and we come to understand what is expected of us when it comes to our financial choices (e.g., saving, smart shopping, donating).

Although these early values and beliefs about money are powerful and long lasting, during the transition from adolescence to adulthood, young people often reinterpret and reorganize their values and beliefs about finances as they prepare for more full-time adult roles and responsibilities. Specifically, when they make their own life choices (e.g., college, career, relationships) and struggle to balance competing goals (e.g., pay off student loans or save for a house), they come to a deeper understanding about the role that money plays in adult life.

This transition period is a key turning point in life, as young adults make a shift from parent-directed behavior to more self-directed behavior.

Joyce Serido is an associate professor in the College of Education and Human Development’s Department of Family Social Science and a University of Minnesota Extension Specialist. Her expertise is in financial parenting; financial behavior and economic well being; and financial behavior and early romantic relationships. Through Extension, Serido and others are leading a series of free webinars focused on family resiliency. Learn more and sign up at z.umn.edu/Family_Resiliency_Webinars.