In simple terms, financial literacy is the ability to make sound decisions regarding saving, borrowing and investing. It is the basic comprehension of the principles of personal financial management.
April is world financial literacy month and a time to highlight and reflect on the importance of financial education and its effects on the citizenry as it is widely accepted as one of the biggest contributors to the inequality gap. The less an individual knows about the basic principles of personal financial management, the less likely they are to budget and save, and the higher the likelihood of unnecessary debt accumulation.
There are three questions created by Director Annamaria Lusardi and Professor Olivia S. Mitchell of the Global Financial Literacy Excellence Centre, which have been used in more than 20 countries to measure financial literacy levels. They test the comprehension of compound growth, real returns and diversification. Their studies have found that there are low levels of financial literacy in both developed and developing countries globally.
The key findings in the Standard & Poor’s Global Financial Literacy Survey were most startling. They surveyed more than 150,000 individuals from various countries around the globe using the three questions developed by Director Lusardi and Professor Mitchell to compile this report. Denmark and Norway ranked tops with a 71% adult financial literacy rate respectively. Surprisingly, the US, a leader in economic growth ranked 14th in the world with only 57% of their adult population being financially literate.
The situation is much worse in South Africa. Only 42% of the South African adult population are financially literate. The latest Momentum/Unisa Consumer Financial Vulnerability Index found that most consumers don’t budget, live beyond their means, have no self-control with spending and new debt and don’t consider risks when taking on more credit. These are all symptoms of a lack of knowledge regarding personal financial management. To make matters worse, the deteriorating economic conditions in our country will undoubtedly have a more pronounced effect on such consumers.
It is, therefore, more important than ever before for individuals to have honest conversations about money and to seek the counsel of experts in the field to guide them along the way. If you cannot afford the services of an advisor, look for free tools online and for institutions that offer free material. The Financial Planning Institute is a great place to start.