Numerous correlated electron systems exhibit a strongly scale-dependent behavior. Upon lowering the energy scale, collective phenomena, bound states, and new effective degrees of freedom emerge. Typical examples include (i) competing magnetic, charge, and pairing instabilities in two-dimensional electron systems, (ii) the interplay of electronic excitations and order parameter fluctuations near thermal and quantum phase transitions in metals, (iii) correlation effects such as Luttinger liquid behavior and the Kondo effect showing up in linear and non-equilibrium transport through quantum wires and quantum dots. The functional renormalization group is a flexible and unbiased tool for dealing with such scale-dependent behavior. Its starting point is an exact functional flow equation, which yields the gradual evolution from a microscopic model action to the final effective action as a function of a continuously decreasing energy scale. Expanding in powers of the fields one obtains an exact hierarchy of flow equations for vertex functions. Truncations of this hierarchy have led to powerful new approximation schemes. This review is a comprehensive introduction to the functional renormalization group method for interacting Fermi systems. We present a self-contained derivation of the exact flow equations and describe frequently used truncation schemes. Reviewing selected applications we then show how approximations based on the functional renormalization group can be fruitfully used to improve our understanding of correlated fermion systems.