What defines financial literacy?

Financial literacy refers to the capacity to effectively manage personal financial matters, which encompasses a range of essential skills and knowledge that individuals need to make informed financial decisions. This includes understanding budgeting, saving, investing, debt management, and the implications of financial choices on one's overall well-being.

Being financially literate means being equipped to navigate everyday financial tasks, such as tracking income and expenses, making informed choices about loans and credit, planning for retirement, and understanding basic investment principles. This foundational ability empowers individuals to achieve their financial goals, avoid financial pitfalls, and build a secure future.

In contrast, understanding complex financial systems, while valuable, is too broad and does not necessarily correlate directly to an individual's ability to manage personal finances effectively. Knowledge of government regulations can be important but does not encompass the full spectrum of personal financial management. Experience in investing in stock markets is more specific and does not reflect the overall ability to handle personal finances in everyday situations. Thus, the capacity to effectively manage personal financial matters is the core aspect that defines financial literacy.