Financial literacy has garnered a lot of attention in the media lately. Our heightened awareness of the financial instability of former economic powerhouses makes us question our finances intuitively. This coupled with respective local proposed ‘bubbles’, be it in Silicon Valley or closer to home for me, the Auckland property market, everything just feels a little in flux.
Prior to the most recent GFC, financial ignorance was arguably excusable. We were both confident in our respective Feds, and the path to financial security seemed a lot more unshakable than the one we walk today. Now however, a lack of comprehension of financial concepts is extremely detrimental to both the individual, and resultantly to society at large.
So what does it mean to be financially literate today?
My definition is purely my own, but I consider a financially literate individual to understand financial products and concepts. They have the skills and confidence to assess and act upon financial risks and opportunities and make well informed decisions that improve their financial well-being.
Why do we need to be financially literate?
It’s safe to assume that majority of the world's citizens partake in some medium of exchange system, be it the standardisation we have in national currencies of one of it’s predecessors. The former is a highly complex and sophisticated system, which majority of participants just see as notes and coins, with the occasional bank loan. We need to understand more than that, and we need to know it prior to needing to know it. Just as we don’t learn to read the first time we sign a binding legal contract, we should preempt financial education as well.
Gaining a foundational level of financial literacy will ensure that personally you will minimise the likelihood of being misled, or making poor financial decisions (like bad debt for example). By improving your financial literacy level further you will be able to actively participate in financial markets like stocks and bond, and plan successfully for the future (retirement schemes). You’ll also be contributing to a thriving community and fostering economic development by continually making informed decisions.
For society this mass increase in financial contribution and participation could result in a surge in competition, increased market efficiency in many sectors (particularly financial services), and we would be able to greatly reduce third party market regulation.
If you want to quantify that a recent Australian study carried out by the Commonwealth Bank Foundation found that if we increased the financial literacy of the least financially literate members of society by 10% this would create 16,000 new jobs and add $6 billion into the economy. Six billion dollars.
How do we become financially literate?
We first need to recognise when our children should be starting their financial education. This is an opinionated discussion that is currently taking place, but some conclusion is settling around the notion of starting this education quite young, and at least in primary school.
The argument states that the current and future financial choices faced by today's youth are far more complex than past generations. Furthermore, young people can expect to bear more financial risk in adulthood due to a general decrease in welfare and occupational benefits, as well as uncertain job prospects. Compounding this, youth become consumers of financial products from a much younger age, and relate to these products in a far less tangible manner.
The OECD have commented that “the development and integration of financial habits and attitudes begin very early and probably before children reach 7 years old.” Compounding that by stating “financial education should start at school. People should be educated about financial matters as early as possible in their lives.”
So if we agree that we should be beginning the financial education process with young children, and that this should take place in schools then we can really start standardising the education our students are receiving to work towards a financially literate society. Just as schools boast literacy rates, so too should they boast financial literacy rates.
Currently the adoption of such teachings in the classroom globally is somewhat lacklustre. That said the rate of adoption is a promising statistic, with 24 countries adopting it in some form over the last few years. Financial literacy is compulsory in ten countries globally, however other nations (New Zealand included) have it as an optional offering, competing for teacher hours against maths, science and English.
The enforcement of financial literacy in the classroom is going to be the obvious catalyst in the improvement of the current state of societies financial literacy in years to come, but making something compulsory and having the teacher support to deliver such programs are two different things. This is not going to be an overnight addition, however every inch closer to it’s inclusion in the classroom equates to literal future dollars in our economy. If this is truly a problem recognised by the masses, it is one investment that we can’t afford not to make.