Why is financial literacy so important and why should we be teaching-learning about this at school

Why is financial literacy so important

As financial decision-making grows more complex year on year, with consumer habits and financial products rapidly changing, financial literacy has taken a blow.

For past generations, cash was used for most of our daily purchases; but today, it’s rarely flashed—particularly not by younger consumers. We are moving ever closer to being a completely cashless society. Added to this the way that we shop has changed with the boom of online shopping becoming the top choice for many. This has created ample opportunities to use and overextend credit—an all-too-easy way to accumulate debt, and fast.

Meanwhile, credit card companies, banks, and other financial institutions are inundating consumers with credit opportunities—the ability to apply for multiple credit cards or even pay off one card with another. Without proper knowledge and understanding, this makes it incredibly easy to get into financial trouble.

Many of us have a limited understanding of finance, how credit works, and the potential impact current spending behaviours on their financial well-being for the years to come. In fact, the lack of financial understanding has been signaled as one of the main reasons why many individuals face problems with getting to grips with savings and investments.

To give this statement value, every few years in the US, the Financial Industry Regulatory Authority (FINRA) issues a five-question test as part of its National Financial Capability Study. This measures consumers’ knowledge about interest, compounding, inflation, diversification, and bond prices. On its most recent test, only 37% of those who took the test got four out of five questions correct, which suggests that the basic economic and financial principles that underpin these problems are widespread, touching every state in the US in different ways. This is lower than it was for the same set of questions given in 2009. Now imagine this outside of the US.

What is financial literacy?
Financial literacy is the coming together of financial, credit, and debt management knowledge that is necessary for us to be able to make responsible financially decisions—decisions that are integral to our everyday lives. Financial literacy includes understanding how a checking account works, what using a credit card really means, and how to avoid debt. Therefore, financial literacy has an impact not only on us as individuals but also our family, as we try to balance budgets, save and buy that new home, fund a child’s education, and even ensuring an income for retirement.

A lack of financial literacy is a problem not only in emerging or developing economies but also in developed or advanced economies. There is a consistent failure to demonstrate a strong grasp of financial principles to understand and negotiate the financial landscape, manage financial risks effectively, and avoid financial pitfalls. Nations globally, from Korea to Australia to Germany, are faced with populations that do not understand financial basics.

The level of financial literacy and understanding may vary with education and income levels, but evidence shows that highly educated consumers with high incomes can be just as ignorant about financial issues as lesser-educated, lower-income consumers (though, in general, the latter do tend to be less financially literate). And it seems that individuals are hesitant to learn. The Organization for Economic Co-operation and Development (OECD) undertook a survey in Canada, in which people reported that they found choosing the right investment strategy for a retirement savings plan was more stressful than a visit to the dentist!

So, what are the trends which are making our need for financial literacy even more important

The following five trends highlight and demonstrate the importance of making thoughtful and informed decisions about finances:

  1. Individuals are shouldering more of the long-term financial decisions and planning
    Past generations depended on a company pension plan to fund the bulk of their retirement. Pension funds, managed by professionals, put the financial burden on the companies or governments that sponsored them. Individuals were not generally involved with the decision-making, and typically did not even contribute to their own funds, they were rarely even made aware of the funding status or investments held by the pension. However today, company pensions are more a rarity than the norm, especially for new workers.
  2. Savings and investment options are more complex
    Consumers are now being asked to choose from a wide variety investment and savings products. These products are more sophisticated and complex than they were in the past, requiring consumers to choose from a variety of different options that offer varying interest rates and maturities. Decisions they may not be adequately educated to make.
  3. Government aid is lacking
    A major source of retirement income for past generations was Social Security. But the amount currently paid out by Social Security is not enough to live on, and it may not even be available at all in the future.
  4. The financial environment is changing
    The financial landscape today is very dynamic. Now as a global marketplace, there are many more participants in the market and many more factors that can influence it.
  5. We are inundated with choices
    Banks, credit unions, brokerage firms, insurance firms, credit card companies, mortgage companies, financial planners to name just a few, are all vying for our attention and assets, thus creating even greater confusion for the consumer.

So, what is the bottom line on this?
Any improvement in financial literacy will have a profound impact on individuals and their ability to provide for their future. Recent trends are making it even more imperative that individuals understand basic finance.

Youth financial literacy is often taken for granted. Most of the time it doesn’t get the seriousness or time it deserves. The irony of it is that in 2022 money affects almost every aspect of our lives.

If we are not going to teach our young adults about money, how can we expect them to manage their money when they become adults?
Financial education should be a continuous process, right from childhood to adulthood. Unfortunately, not many learning institutions seem to recognise this fact. It is not generally on the curriculum and let’s be honest 1 off lesson here and there are just not sufficient.
We tend to assume that young adults will somehow learn about money on their own. However, there needs to be a paradigm shift when it comes to financial literacy. The importance of financial literacy for our young adults cannot be overemphasized. There’s nothing as dangerous as a financially illiterate youth. Someone who doesn’t have an idea on how to manage their finances can easily fall into various financial traps unknowingly.

It is generally difficult to fix bad decisions and habits concerning finances once they have been made – it can take several years to do so. Teaching individuals about money from an early age will impart them with vital knowledge and skills and will assist them to make informed decisions when it comes to financial matters now and in the future.

Here are some of the reasons as to why financial literacy is important for not only young adults but all of us:

  1. It empowers us
    You will have heard people saying that information is power. The same thing applies to financial matters. The more information you have about finance, the better-equipped you will be. On the other hand, a lack of proper knowledge and information about money is dangerous for anyone.
  2. Financial illiteracy breeds ill-equipped adults
    Statistics indicate that individuals who never received proper education on finances generally end up as irresponsible adults, particularly regarding money matters. Not knowing how to save or invest correctly, they never or to struggle to save enough money to buy a home and often have poor credit scores.
  3. A lack of financial education makes it easy for us to pick up bad financial habits
    Often, individuals who have poor money habits such as overspending, have had none or just limited information in support of financial literacy. These individuals are easily influenced by others to engage in often poor financial habits. A person with a proper financial background won’t be easily lured to participate in activities such as excessive buying on credit or investing in pyramid schemes.
  4. Financial literacy helps us to be better prepared for emergencies and how to handle them financially
    Sometimes we are caught up in urgent situations that require large amounts of money. For a young person who is financially literate, it becomes a little easier to be able to review and evaluate options clearly helps to reduce making bad decisions even in times of stress and emergency.

In other words, there are numerous reasons as to why financial literacy is important for our youth. They should constantly be taught about how to save, invest, budget and manage debts. Failure to do so can lead to a generation that’s not only financially irresponsible but also poor.

To sum this up (no pun intended …) being financial literacy in 202s is very important. A person’s young adult years are a critical stage in life. The mistakes that you make as a young adult can and often do have a great impact on your adult life.

To listen to the full version of this topic please listen to #Notjustmakingthetea Podcast S2.Ep13
It’s time to get real-world financial literacy on the curriculum …

About EducationYalla
What are the SKILLS required for a ‘future-proof’ workforce and career?
EducationYalla focuses on the development of Future Skills – C21st SKILLS, FINANCIAL LITERACY, SUCCESS STRATEGIES, HEALTH & WELL-BEING AND MORE … EducationYalla with its collaborators (The Experts) and sponsors, designs and delivers activities incorporating challenging, stimulating and real-world relevant tasks and information. The activities encourage and embed the development of critical thinking, leadership skills, creativity, problem-finding and solving, whilst also maximising learner engagement.

 

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