The subtle difference between Financial Literacy & Financial Capability

“Without Knowledge, action is useless and knowledge without action is futile.”

― Abu Bakr

The terms financial literacy and financial capability are closely related, but have distinct meanings. These terms get thrown around all the time, but what do they actually mean? We outline the differences below and explain why you should care.   

Financial Literacy (Knowledge)

Definition: Financial literacy refers to the knowledge and understanding of financial concepts and skills. This includes understanding topics like budgeting, saving, investing, credit, debt management, and interest rates.

Focus: The emphasis is on the ability to access, analyse, and communicate about various financial situations and concepts. It involves knowing what terms mean and how financial products work.

Goal: The goal is to equip individuals with the information necessary to make informed financial decisions.

Financial Capability (Action)

Definition: Financial capability goes beyond knowledge to include the ability to apply that knowledge in real-life situations. It encompasses not only understanding financial concepts but also the confidence and skills to act on that knowledge effectively.

Focus: It includes factors such as emotional resilience, decision-making ability, access to financial services, and a supportive environment. Financial capability emphasizes taking action based on one’s understanding and skills.

Goal: The goal is to empower individuals to take control of their financial lives, make informed choices, and effectively manage their resources over time.

Summary

In essence, financial literacy is about knowing, while financial capability is about doing. Someone can be financially literate but may struggle to apply that knowledge due to a lack of confidence, resources, or support systems. Conversely, someone may have strong financial capability even if their financial literacy is limited, particularly if they have developed practical skills and resilience through experience.

Now that you understand the differences, don’t just ‘get round to it’, take action and get in touch with your DUX adviser today!