These days, most people have some kind of technology device, wether it be a cell phone, tablet, laptop, or desktop computer. So is it safe to assume that all of my users are computer literate? (i.e. understand most of the "computer-y" terms such as windows, dialogs, modals, menus, etc.)
Short answer: no.
I don't know about your parents, but mine each have a smart phone and they have a Windows laptop at home. I wouldn't say they're computer literate, though. They know how to do the things they need to do: read email, make a phone call, send a text. But beyond that, they get frustrated and give up. (My mom has seven Facebook accounts. Just yesterday couldn't figure out how to reply to a text I sent her.)
They're not idiots. They just have much better things to do than monkey around with their devices all day to learn the way things work. And I'm not referring exclusively to the 70+ demographic. I've seen working people have the same kind of problems.
Get to know your users. Get to know users in general. Watch your friends and parents and coworkers as they use their technology. I often see people lose confidence when they have to do something out of their ordinary routine.
I argue for the sake of devil advocating and promote a different school of thought.
Do not include 'being nice' when it comes to logical decisions. 'Illiteracy' is a state of knowing, not an accusation.
Most people, including the younger generation, follow a set of instructions - an illusion they know what they are doing. Just because they are on social media, it does not mean they are computer literate.
Putting the audience literacy rate to low, allows you to discover better ways to implement user experience.
I do believe most people have better things to do than monkey around their devices, but often they simply stay ignorant and prefer screaming at a customer service staff instead.
I think it's much safer to assume the audience are made of idiots. Most people will tell you "make it friendly for everyone". Every time the word 'everyone' pops out, you have to make it dumb proof. So-called 'literates' have a random set of literacy anyways.
Most UX guides will ask you to use the most simple, basic words, or other elements anyways, suitable for "everyone". Google and other large service providers use this method.
People will learn what they need, and find the easiest way to do so. Even literates. Everyone wants fast, useful, and simple applications.
To be honest, I have no idea why it is not safe to think this way. If you found out that your audience are really computer-literate, would you purposely make everything harder, or ignore a large chunk of UX? If you cannot explain anything simply, you are not so good at it.
I do not go out and call people stupid, but your personal morals do not matter here. I just think it's safer to assume users don't even know how to read. I know the logical answer is "do research!", but if you are on a smaller scale, there is a lot to assume.
It's not safe to make assumptions like this, based on broad generalisations. Certain data about your specific users can sometimes translate into informed assumptions, which you can then validate. You should also consider what you mean by "computer literate" and how you believe that should inform your design. It's not really precise enough to be a useful data point IMO.
In UTs I have seen that many people are confused by an unfamiliar interface, even those who are comfortable / experts with specific systems or devices. On one project I had a user base of specialist staff members who would be using the system daily, after receiving training, and even with those users (relatively homogenous / known quantity) I found material differences in style (e.g. mouse vs keyboard), experience and competence.
"Computer Literacy" - is a very broad term covering a very wide set of skills.
You really have to break it up into experience using an Operating System (and version) and specific skills for each bit of applications software (email, wordprocessor, spreadsheet, any programming skill etc etc).
Trying to recruit people by 'computer literacy' for testing is really difficult as I've found to my cost !