Personal Finance vs. Financial Literacy – What is the Difference?

Want to know a little more about the differences between personal finance and financial literacy? Keep reading!

bag of money next to coins


Bridget Houlihan


Jan 21, 2021

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Whether you want to make sure we have enough saved for retirement, or you’re interested in purchasing your first home, the world of money and finances is much easier to navigate when you have some financial literacy. Everyone’s financial journey will look different, which is why it’s hard to go with a one size fits all approach to personal finance. But what exactly is financial literacy and how does it apply to your own personal finance journey? 

If you’re curious to learn more about the difference between these essential components of everyday life, then you’ve come to the right place. In this article we’re going to discuss:

  • What personal finance is
  • What it means to be financially literate
  • The differences between the two

What is personal finance (& why is it important)?

Are you making the right decisions when it comes to your personal finance?

symbols related to personal finance
Your personal financial decisions can have a major impact on your life. Image courtesy of The Berkshire Edge.

Personal finance refers to the processes of planning, scheduling, and managing all your financial activities. Everyone who is managing their own or their family’s household expenses is taking part in this financial process, which is why no two personal finance journeys look the same. Learning how to manage budgets, expenses, and income are large parts of personal finance, but they are not the only ones. 

Personal finance can also refer to the industry that provides the tools and services necessary to help individuals and families set and reach their financial goals. 

Typically, personal finance is broken down into five categories:

  • Income. This includes the wages you’re paid from your job as well as any pensions or dividends if available.
  • Spending. This is the other side of income and refers to everything you spend money on, including your necessities like rent, food, and utilities, but also items like credit card payments, loan payments, restaurants, and entertainment purchases.
  • Saving. Besides income and spending, your personal finances also include your savings. This is the money that you can either choose to invest, or to save for later purchases.
  • Investing. Should you choose to invest some of your savings, you may want to consider stocks, bonds, real estate, mutual funds, etc. People like to invest because they may end up getting a higher return in the future.
  • Protection. Finally, personal finance also includes the money you set aside for protections such as life, home, and auto insurance. Tangible assets such as property investments (bought at good prices) with a wise use of debt are also a great hedge against the long term effects of inflation.

Why is personal finance important?

Understanding how to make the best possible decisions for your personal finances is essential to live the life you want to live, and also plan for the future. Much of personal finance involves planning for the long term and ensuring that you and your family will be cared for down the road. Without good personal finance strategies, you may miss out on valuable ways to afford what you need today, as well as save for what may come in the future—including unforeseen emergencies.

You can choose to start your own personal finance journey, or you can enlist the assistance of a professional like a financial advisor or a personal banker. They’ll take the time to sit down with you and map out your particular goals, and what you need to do in order to achieve them. Working with a professional can provide you with a guide that will take you through the steps you need to get where you want to be financially. They will also help you assess your plan, and make any adjustments if necessary.

What is financial literacy?

Do you know what it means to be financially literate? If not, keep reading!

picture of something seeing their personal finance grow
Being financially literate can improve your personal financial situation. Image courtesy of Wealth of Geeks.

You may have heard the term financial literacy used more often lately, and that’s because many Americans don’t think they’re very financially literate. In fact, according to the Financial Industry Regulatory Authority, 66% do not consider themselves financially literate at all and this is dismaying. Financial literacy refers to the ability to use financial skills, ideas, and tools in order to manage your own finances and budget. Basically, when someone is financially literate, they’re confident in their abilities to manage their own personal finances. 

When you’re not very financially literate, it may hurt your chances of financial success in the long term. Not being aware of how to best manage your income and spending can lead to a variety of negative consequences including:

  • Taking on more debt. There are all kinds of ways you can accumulate debt very easily in our society. Most Americans have more than one credit card with a balance, in addition to student loans, unpaid medical bills, and car payments. When you don’t know how to shop around for the credit cards with the best interest rates, or the alternatives that are available besides student loans, you can find yourself with a lot of debt that is not easy to get rid of.
  • Poor spending decisions. Financial illiteracy can also lead to poor spending decisions or impulse buying. Just because you have the income available after payday, doesn’t mean it needs to all be spent. Financially savvy people know that some should be put away into savings or investments.
  • No long term preparation or protection. When the majority of your income goes to necessities such as rent/mortgage, utilities, food, and other basics, there’s nothing left over to save for the future. This can be disastrous when an unforeseen emergency occurs such as a stay in the hospital.
  • No savings. If you’re unsure how much you’re actually spending each month, it can be hard to save money. Without savings, you cannot get yourself out of debt or achieve goals such as buying a house.

Financial literacy is an important skill, and everyone should strive to learn more about it so they can make the best decisions for their own personal finance situations. 

What are the benefits of using financial literacy to make good personal finance decisions?

  • You can avoid costly mistakes that could lead to bankruptcy or default
  • You can reach your financial goals such as saving for retirement, buying a house, or going on a vacation
  • You are ready for unexpected emergencies such as a job loss or medical bills

Financial literacy is essential in order to make sound personal financial decisions. You can learn how to make better financial decisions by educating yourself or speaking with a financial professional.

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December 4, 2022
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