The nature of financial literacy

The notion of financial literacy is not a new one. It is widely perceived as being important, hence something to be encouraged in those who are not financially literate, as exemplified by the existence of organisations dedicated to generating financial literacy in, for example, Australia, Canada, the U.K., and the U.S.A. But what does the term financial literacy actually mean? What distinguishes a financially literate individual from one who is financially illiterate? This chapter investigates aspects of financial literacy in particular contexts (embracing households and formal organisations" whether profit-seeking enterprises or public sector bodies). As a prelude to defining what is meant by financial literacy, however, the basic idea of literacy itself (subsuming numeracy) is considered. The fraught confusion over financial awareness and financial literacy, often viewed as being synonymous expressions, is addressed. This confusion arises (at least in part) from inadequate definitions of financial literacy (which clearly has implications for its operationalization). These limitations are explored and a fuller definition of financial literacy is provided as a point of reference for accounting educators.