What is financial literacy? The five principles you need to know

1 min readLast updated January 16, 2024by Lisa-Marie Voneshen

Financial literacy should be an integral part of your life. This article explains what exactly financial literacy is and how you can become more proactive with your money.


  • Financial literacy includes understanding financial principles and concepts and putting your financial skills to work to achieve your goals.  

  • Not understanding your finances can lead to bad decision-making and missed opportunities.  

  • Financial Literacy Month takes place in April each year.  

  • If you want to improve your finances, speaking to a financial advisor is the best place to start; let Unbiased match you with an advisor perfectly suited to meet your needs.  

What is financial literacy? 

Financial literacy includes understanding financial knowledge, principles and concepts and making use of a variety of skills to navigate your personal finances and achieve your goals.  

This knowledge includes everything from understanding your tax liabilities and compound interest to financial planning and debt management. The skills you gain should be able to help you with many financial goals, including investing, retirement planning and budgeting.  

Ultimately, financial literacy helps you make better financial decisions and improves your overall financial well-being.  

Financial literacy is often also referred to as financial capability. Here, the U.S. Treasury defines financial capability as “the capacity, based on knowledge, skills, and access, to manage financial resources effectively.” 

Unfortunately, financial literacy isn’t high in the US. According to the Unbiased 2023 Financial Confidence Survey, over four in five people admitted they regularly run into financial terms they don’t understand, while 17% of respondents said they have no financial confidence.  

Improving your financial literacy can help you throughout your life, from making good investment decisions to planning for retirement. So, it’s important you have a solid understanding of your finances and how your decisions impact your life.  

How can I learn financial literacy? 

Not understanding your finances can be dangerous. It can lead to bad decision-making and missed opportunities, which in turn could mean you lose out on money or even deplete your savings.   

While building your financial literacy may seem like a daunting task, it doesn’t have to be.  

According to multiple financial experts across the US, there are five basic principles of financial literacy. These principles provide a solid foundation to empower you to make confident, informed decisions about your money and help you achieve your financial goals.   

The five principles of financial literacy 

Let's take a look at the five principles and how you can put them into practice:  

  1. Earn 

  2. Save and invest 

  3. Protect 

  4. Spend  

  5. Borrow and manage debt 


Your income is the foundation of your finances. 

How much you earn, where you earn it, and how you manage your income should be the first things you look at when developing your financial literacy.  

Two of the most important aspects of this principle include:  

  • Take advantage of workplace benefits – Signing up for workplace benefits, such as a 401(k) employer match, helps ensure you’re not leaving any free money behind. Ensure you’re signed up for all your benefits and are making the most of them.  

  • Contribute to your retirement plan – Setting up automatic payments into your retirement plan allows you to save for the future and invest your money wisely.  

Save and invest 

Creating a budget and planning for the future is one of the most important ways to achieve your financial goals. It allows you to build your wealth and develop ways you can make your money work harder for you.  

Here are some of the most important aspects when it comes to saving and investing:  

  • Create a budget – Have a plan for your money and stick to it as best you can, monitoring your income and expected monthly expenses.  

  • Implement saving pots – One of the best pieces of advice is to start small. Put money into savings pots: house funds, wedding funds, retirement, or life insurance. These don’t have to be huge amounts, either. Putting a little bit by each week or month, depending on when your paycheck comes through, will go a long way.   

  • Start investing – Investing is an effective way to build your wealth. However, it’s important to invest wisely and safely to protect your money while still generating returns on your investments. 


Understanding your cash flow and how you spend is crucially important to meeting your financial goals and improving your financial literacy. Are you spending wisely? Or do you come to the end of the month and wonder where your money has gone? 

Here are two important things to remember regarding spending:  

  • Track your spending – Using your budget or other tracking tools can help you monitor what you’re spending your money on. This can help identify any areas for improvement and help you stop spending unnecessarily.  

  • Spend mindfully – Being mindful of how you spend can lead to financial freedom – having enough money to cover your expenses and live the lifestyle you and your family desire without worrying about financial constraints.   


Life is full of unexpected curveballs, such as losing your job, big home repairs, or an unexpected bill. So, it’s essential you protect your finances and take steps to safeguard your financial future.  

The best way to do this is to create an emergency fund. According to financial experts, you should aim to have at least three months’ worth of expenses saved for emergencies. This way, should the worst happen, you are prepared.  

When protecting your finances, you should also prioritize the following: 

  • Getting insurance – Insurance, such as health, home, car and life insurance, gives you and your family peace of mind, providing a financial safety net to help you through the unexpected.  

  • Retirement planning – Protecting your retirement fund is vital to ensure you grow your nest egg enough to sustain you throughout this new chapter of your life. 

  • Estate planning – This involves getting your affairs in order and deciding how you want your assets to be distributed.  

Borrow and manage debt 

Whether you’re getting a mortgage, paying for college, or covering a big purchase, for many of us, borrowing is a part of our financial life.  

However, borrowing wisely is essential to build your credit and avoid getting into unnecessary debt. To do this, you should include the following in your financial planning: 

  • Be strategic with your debt – When borrowing money, ensure you’re always borrowing within your means and have a clear and management repayment plan.  

  • Make repayments on time or early – When making repayments, it’s essential you don’t fall behind. Always make your repayments on time to avoid damaging your credit score.  

  • Monitor your credit score – Debt can impact your credit score, so it’s vital you keep an eye on how it’s performing and intervene when necessary.  

When is Financial Literacy Month? 

In the US, Financial Literacy Month is observed each year in April.  

Originally starting as “Youth Financial Literacy Day,” introduced by the National Endowment for Financial Education, the month has evolved since then to encompass all Americans. 

In 2023, the US Senate passed a resolution officially designating April as Financial Literacy Month.  

Also known as National Financial Capability Month, the purpose of the month is to raise awareness of the importance of financial literacy and maintaining smart money habits. 

According to My CreditUnion.gov, the month has “evolved to focus on financial literacy and ensure that Americans have access to unbiased and trustworthy financial education and understanding of financial services and products.” 

Get expert financial advice  

Improving your financial literacy is essential for making confident and good financial decisions. If you want to improve your financial literacy, speaking with a financial advisor is a good place to start.  

In fact, according to the Unbiased 2023 Financial Confidence Survey, 41% of respondents said advice from financial advisors would give them the most reassurance when making a financial decision. 

With Unbiased, you can get matched with an independent SEC-regulated, fiduciary financial advisor who can provide expert guidance when it comes to making life’s big financial decisions.  

Finding a financial advisor doesn’t have to be difficult. Simply complete our two-minute questionnaire telling us a bit more about what you’re looking for, and we’ll do the rest.   

Find your perfect financial professional today.

Senior Content Writer

Lisa-Marie Voneshen

Lisa-Marie Voneshen is a Senior Content Writer at Unbiased. She is an award-winning journalist with nearly a decade of experience writing and editing content across various areas, including personal finance and investing.