The Five Components of Financial Literacy

by | Apr 27, 2023 | Finance

Financial literacy empowers us to make the choices that will balance meeting our needs with our goals and wants. Being financially literate means knowing how to navigate the financial system so you can make the most of your money. Studies have shown that people with better financial literacy are more likely to be protected from financial stress. 

On the flip side, lacking financial literacy has consequences. Financial illiteracy cost Americans $1,819 in 2022, equating to more than $436 billion in the U.S. combined. 

Let’s dig into the components of financial literacy and cover some ways to strengthen your money mindset. 

What is Financial Literacy?

Financial literacy is an understanding of basic money principles and the ability to apply them to your financial situation. What does that really look like? Being financially literate means understanding what’s going on with your funds now and in the near-term financial future. It means being comfortable and confident making decisions that will contribute to your financial stability. It’s not about earning a certain amount of money or having a specific figure saved; it’s about your knowledge and comfort with the financial system. 
Financial literacy has five components: earn, spend, save and invest, borrow, and protect. A basic understanding of each and how it applies to you is critical to achieving basic literacy. There is always room to learn! The more you know about finance and how it works, the better equipped you’ll be to make smart money decisions. 


Knowing how much money is coming in on a regular basis is step one to understanding your financial situation. Without knowing how much money you make, you can’t plan for other financial scenarios like how much you can spend or save. For most people, this will come from your primary income source, like your job. 
But, don’t forget to look beyond your paycheck and include any side hustles, employer benefits, government benefits, dividends or gifts. 

Ways to apply this to your world: 

  • Take advantage of your employer benefits, such as 401(k) matching, stipends, and FSA/HSA accounts. 
  • Increase your earning potential by pursuing additional training or certifications. Some employers may even cover the expense for you!  
  • Increase your income with a raise, promotion, or new job. 
  • Depending on your industry, labor shortages may give you the power to negotiate a better salary
  • Learn about common tax credits and deductions and see if any of your everyday expenses could save you money at tax time. 


Depending on how you look at it, spending can be one of the easiest or hardest pillars of financial literacy. Building an awareness of how much you spend, and on what you spend, is crucial to mastering this skill.  

Ways to apply this to your world: 

  • Categorize and calculate your spending over the past three months, or more if your recent spending has been unlike your typical spending. This will give you an idea of your average spending and act as a useful guideline for building a budget. 
  • Use a finance or banking app to get insights into how you spend and save. With the Milli app, you can track your spending in real-time and break your spending down by category, vendor, or amount. 
  • Motivate yourself to spend less by keeping a reminder of a long-term goal on hand. Whether it’s a post-it note on the fridge or a tropical beach as your phone background, visual reminders can help keep you focused and resist the urge to impulse shop. 
  • Consider quality and price when making a purchase. Buying a more expensive product that’s higher quality can save you money in the long run by not having to replace it as quickly or as often. 

Save and Invest

Bigger financial goals, like home ownership and retirement, require much more planning and strategy. Not only do you need to set money aside regularly, but you also need to help it grow. It’s common to be overwhelmed or intimidated by these concepts at first, but even little steps result in progress.  

Ways to apply this to your world: 

  • Start a savings account with Milli. With our unique Jars feature, you can easily work toward multiple financial goals by putting your money away for specific goals. 
  • Experiment with a retirement calculator to see how accounts grow over time and get a better idea of how much you need to save to reach your ideal retirement age. 
  • 401(k)s aren’t the only retirement option; there are plenty of other options to consider.
  • Get your feet wet with a micro-investing app like Acorns or open a brokerage account to invest in the stock market. But, be sure to start small and make informed decisions with each of your investments, because it is possible for investments to lose value.
  • Listen, read, watch or follow a money expert. Look for one that has financial training, such as a fiduciary financial advisor who is obligated to act in their clients’ best interests. 


Borrowing money powers and impacts both the local and global economy. It can be a powerful tool. 

Borrowing money can make the cost of things like a home, vehicle, or college education attainable in the present without having to save up thousands of dollars to pay in full. But, when consumers borrow money for nonessentials, or borrow more they can pay back, they may find themselves farther behind in achieving financial stability.   

Not all debt is bad. It’s how we manage our debt that’s crucial, and understanding how debt works is the first step. 

Ways to apply this to your world: 

  • Learn about credit scores. Those numbers carry more weight than you might think. Your credit score is used to determine the interest rate on your loans, the limit of your credit cards – it even factors into qualifying for renting an apartment. 
  • Learn how interest rates work. Interest rates are a fundamental part of finance. When investing, interest rates are how your money grows. When borrowing, interest rates determine how much money you will owe in addition to the original loan amount.   
  • Make a plan to pay off debt. Outstanding debts can eat at your savings and make it harder to reach your financial goals. There are different strategies you can use to pay them down.    
Graphic saying "What is APR? Annual percentage rate: the cost post each year to take out a loan or borrow money, expressed as a percentage. The annual "price" of borrowing money.
What is APR?


We can only wish we lived perfectly smooth lives, but we know surprises happen and unexpected costs arise. Whether it’s an unexpected emergency or your debit or credit card has been compromised, you need to have protections in place to keep your finances safe and steady.  

Ways to apply this to your world: 

  • Review your accounts and credit reports regularly; this will make it easier to spot suspicious activity. You can request a free credit report once a year. 
  • Do not save your credit and debit card numbers to your device. A safer option is to use a virtual card with biometric security features, like Milli offers.  
  • Look for the ‘s’ at the end of https in a website URL, when making online payments. This indicates that the site uses a type of security encryption called “Secure Sockets Layer,” which provides an extra layer of protection to your payment info. Only buy from websites you can verify are legitimate businesses.  
  • Turn on extra security functions for accounts and payment methods, such as two-factor authentication. 
  • Build up an emergency fund to provide some protection in the event of job loss, medical expenses, or other unforeseen expenses. 
  • Make sure to have insurance policies with sufficient coverage to meet your needs, like health insurance, accident and critical illness insurance, home or renter’s insurance, auto insurance, pet insurance, and life insurance.  


It’s important to remember that literacy is a skill, and skills need much practice to stay in tune. Identify ways you can integrate the tips into your daily life based on your current habits and near and long-term goals. Then, start living them when various financial-related scenarios pop up in your life! 
Don’t get overwhelmed if you’re not comfortable with your finances overnight. Keep at it – it’s worth the hard work! It’s never too late to refresh your knowledge or learn something new. Having a strong financial understanding will provide significant benefits that last a lifetime.  

Keep reading on the Milli blog:

4 Benefits of a Mobile Bank
5 Ways to Save Money and Live More Sustainably – Simultaneously
How to Cover Unexpected Expenses