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ARE YOU FINANCIALLY LITERATE?
Our lives revolve around finance most times than not. Failing to understand the value of comprehending financial matters can often land a person in trouble. Without an understanding of basic financial concepts, people are not well equipped to make informed decisions related to financial management. So what is financial literacy? It is the education and understanding of various financial concepts and terminologies which drive our existence. A person who is financially literate has the ability to make financial choices such as savings, investing, borrowing among others. Lack of financial literacy results in poor decision making thereby having negative consequences on the financial wellbeing of a person.
WHY IS IT IMPORTANT?
With the rise in the incorporation of new financial institutions, the global population is exposed to a wide range of complex financial products. With governments pushing access of financial services to every nook and corner of the nation, the number of bank accounts and credit products increase significantly. Financial ignorance carries a heavy price. Clients who fail to comprehend the concepts of compounding interest spend more on transaction fees, increased debt structure and incur higher interest rates on loans. In hindsight, the debt of individuals exceeds savings. Having a strong financial base will drive better planning and savings for retirement. Financially sound investors are more likely to diversify risk by spreading funds across numerous ventures.
S&P GLOBAL FINLIT SURVEY
It is imperative to understand basic financial concepts as well as the financial skills prevalent among groups and gender. In this context, The Standard & Poor’s Ratings Services Global Financial Literacy Survey 2015 provides a glimpse of the performance of surveyed countries. Arguably, the survey was a first of its kind to analyse financial literacy levels on a global stage. The survey was conducted in more than 140 economies where more than 150,000 randomly selected adults were interviewed during 2014. Questions assessing basic knowledge of four fundamental concepts were used to measure financial literacy levels. Through this survey, a person was defined as financially literate if s/he could correctly answer at least three out of the four concepts. The questions covered interest rates, interest compounding, inflation and risk diversification. The questions were as follows:
Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?
Suppose over the next 10 years the prices of the things you buy double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today?
Suppose you need to borrow 100 US dollars. Which is the lower amount to pay back: 105 US dollars or 100 US dollars plus three percent?
Suppose you put money in the bank for two years and the bank agrees to add 15 percent per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years?
Suppose you had 100 US dollars in a savings account and the bank adds 10 percent per year to the account. How much money would you have in the account after five years if you did not remove any money from the account?
When the results were disclosed, it displayed numerous appalling findings. Only 1-in-3 adults were financially literate. It literally meant that around 3.5 billion adults lacked an understanding of basic financial concepts. The survey had numerous interesting insights into the global financial literacy levels.
Scandinavian countries lead the way in which Norway, Denmark and Sweden held the first three positions. Israel and Canada rounded up the top five. While the United Kingdom grabbed the sixth position, USA was found trailing at the 21st position. China had 28% of adults who were financially literate while India had a meager 24%. Nepal had an abysmal 18% to its credit. Afghanistan, Albania, Angola, Somalia, Tajikistan and Yemen scored less than Nepal in the global survey.
The financial literacy rates differed when it came to characteristics such as gender and age. Globally, 35% of men were deemed financially literate while the figure for women stood at 30%. The rates also increase with age but later declines with age. On an average, 56% of adults aged 35 or less are financially literate in comparison to the 63% for adults aged between 35 and 50. However, the figure declined for adults after the age 50.
WAYS OF IMPROVING FINANCIAL LITERACY LEVELS
Here are few methods to improve financial literacy levels.
- Change is Inevitable: Someone had rightly quoted that the only constant in life is change. Hence, what worked 20 or 30 years back, may not work today. While history is a great teacher, an individual should look for innovative ways to mitigate the changes applicable in the economy or the industry one works in or the very financial situation.
- Financial Literacy Courses in College: The conventional wisdom states that financial literacy courses should be included during college where a student is exposed to different products of financial institutions. The courses will complement the practical aspects of the experiences leading to enhanced understanding of the products. Courses constructed along similar lines will help students stand in good stead in ensuing days.
- Learning is a Continuous Process: While exposing individuals during college years may be an ideal platform, the process should not end there. At various points in life, an individual must learn how to decrease debt, or to refinance your home or to save for retirement.
Given the risks involved, policymakers should build appropriate consumer protection system to safeguard citizens from financial abuse. Researchers have found that financial literacy programs can lead to smarter financial decisions. Likewise, financial savvy adults are less likely to default on their loans and more likely to save for retirement.
Ironically, April 2017 was declared as the Financial Literacy Month. It was an effort to raise awareness regarding financial management. But while it definitely raised some curiosities, the value of financial literacy is the need of the hour as our nation is on the brink of change yet again.