The Importance of Financial Literacy

Learning some basic investing concepts can set you up for a much richer retirement.

Aug 28, 2014 at 9:08AM

Financial literacy is something we can benefit from at all stages of life. From saving for a college education to getting by in retirement, many people today are feeling extreme financial anxiety and are looking for answers.

Unfortunately, many Americans are unfamiliar with even the most basic economic concepts needed to make saving and investment decisions. In fact, research shows that more than half would fail a basic finance quiz. This lack of financial knowledge presents serious barriers in home purchases, retirement planning, and other financial choices.

A well-informed consumer is critical to a strong and stable economy. While there are no guarantees or one-size-fits-all solutions to every monetary situation, knowing a few fundamentals could do wonders for your finances and your peace of mind.

Spending versus saving
Over time, your savings can make a large difference in your future financial lifestyle. Paying attention to how you spend your money will reveal opportunities to cut back. However, savings should be the money you set aside before you spend. In short, you need pay yourself first. Make it easy by setting up automatic contributions from each paycheck to your retirement savings account.

Thinking of personal savings as the first bill you pay is an easy way to help build your savings gradually. If you are consistent, no amount is too small to make a difference. Regular contributions also help you take advantage of compound interest.

Compound interest is interest earned on interest. For example:

Let's say you have $1,000 and it earns an 8% return annually. At the end of 10 years, it will have grown to $2,158.92, even if you never added another penny to it. This assumes that you do not withdraw investment earnings or make any additional contributions.

Note how your balance would grow exponentially over time:


Future Value Without
Additional Contributions





















Retirement planning
Baby boomers -- those born between 1946 and 1964 -- are now beginning to retire en masse. In the Employee Benefit Research Institute's 2013 Retirement Confidence Survey, workers aged 55 and older said the following about their retirement savings:

  • 60% have less than $100,000 in retirement savings
  • 43% have saved less than $25,000
  • 36% have saved less than $10,000

Pretty scary, huh? What we can learn from this, though, is the sooner you start investing for retirement, the better. Thanks to an investment strategy known as dollar-cost averaging, you can get into the market at a predetermined schedule that feels comfortable. Coupled with the effects of compound interest, a plan for entering the market can be a strong ally in the quest to reach your retirement goals.

Dollar-cost averaging is a simple practice by which you put a set amount of money into your investment and retirement accounts each month. When you set up a 401(k) at work that automatically puts money into the account directly from your paycheck, you're using dollar-cost averaging -- even if you don't realize it. 

Here's an example: Let's say you invest $2,000 in a mutual fund over the course of five months. Using dollar-cost averaging, you could plan to make five monthly investments of $400 each, buying shares at both highs and lows. At the end of five months, you own 150 shares that cost you $2,000. 

Monthly Investment

Share Price

Shares Acquired



















Dollar-cost averaging not only makes investing low-effort and habitual, but it also enables you to take advantage of price dips. In this example, buying $2,000 worth of shares in the first month at $14.28 per share would have resulted in only 140 shares, whereas using dollar-cost averaging over the course of the five-month period (during which you purchase shares at varying prices) netted you 150 shares at an average price of $13.36 per share. That's 10 additional shares worry-free because you automatically spread out your purchases.

Financial knowledge and decision-making
Figuring out which investing strategy works for you can be intimidating, as the investments you choose help determine whether or not you achieve your financial goals. But before you randomly make choices, take some time to think about your risk tolerance -- that is, your ability to withstand swings in the value of your investments. Your risk tolerance should take into account your specific goals, your time horizon for each goal, your additional financial assets, and the stability of your job. Revisiting your risk tolerance as your circumstances change is important to help ensure your portfolio is best suited for your situation.

Having some basic financial know-how can help you make the best decisions regarding your money and retirement. If you're feeling overwhelmed by loads of information or would like a professional to guide you through the process, reach out to a qualified fee-only advisor. They can help make sure you're on track to affording the retirement you want.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers