The Importance of Financial Literacy

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The Importance of Financial Literacy

When making economic decisions, people who understand and can apply basic financial concepts are considered financially literate. People are always making complicated financial and economic decisions with long-lasting implications. Young individuals entering adulthood are suddenly bombarded with decisions concerning credit cards, loans for college tuition, mortgages, and budgets. Senior citizens need to start considering their retirement strategies. Making wise financial decisions, comprehending the world, and being a responsible citizen all depend on having a solid understanding of finance.

The pension system is undergoing changes, financial instruments are becoming increasingly complex, including new ones like crypto assets, and risks are rising due to the war in Ukraine and climate change. The need for financial literacy is greater than ever for all of these reasons.A large number of people lack financial literacy, which not only restricts how well they can use their resources but also plays a role in macroeconomic issues.

Adopted in 2020, the OECD Recommendation on Financial Literacy acknowledged financial well-being as the main objective of financial literacy. Even in nations with sophisticated financial markets and individuals actively participating in these markets, levels of financial literacy are shockingly low. According to the latest OECD adult financial literacy survey, many of the G7 and G20 bloc nations have poor levels of financial literacy. This aligns with the findings of a global financial literacy study, which reveals that a limited number of nations achieve high scores on the most basic financial literacy criteria.

High school students also have low financial literacy, which suggests that the next generation will not be prepared to handle the changes and problems ahead of them. Based on the most recent wave of the OECD Program for International Student Assessment (PISA), some G7 nations, including Italy, have roughly 20 percent of their pupils lacking basic proficiency in financial literacy. In other nations, including Brazil or Peru, that ratio exceeds forty percent.

Money, Markets, and Misinformation: The Urgent Case for Financial Education

In many developing nations, a significant portion of the population lacks basic access to basic assets such as bank accounts, let alone access to financial markets, including the stock market. If money is important for growth, then knowing how to handle it is also essential. This is because knowing how to handle money can encourage people to join financial markets and use money wisely. As the financial markets get more complex, being able to take advantage of new investment opportunities can also help reduce inequality.

Another important effect of financial literacy is policymakers’ ability to make economic changes. Similar to personal financial choices, many reforms require making a trade-off between an immediate advantage and a longer-term cost. Low financial literacy, on the other hand, might make it difficult for someone to understand the value of future benefits or how government budgets and organisations like Social Security and the pension system operate. In most cases, there has been strong hostility to attempts to modify pension systems, despite changes such as declining birth rates, longer life expectancies, and other factors that could make the current systems unsustainable.

According to research conducted by the EU to monitor the level of financial literacy among EU member states, 18% of EU residents have a high level of financial literacy, 64% have a medium level, and the remaining 18% have a poor level, with great differences between member states. The findings also highlight the importance of financial education for women, young people, low-income individuals, and those with a lower level of general education, who are on average less financially literate than other groups. So what is the EU doing about these low financial literacy rates? Numerous frameworks have been published, and the Commission is collaborating with member states to develop definitive policies, programs, and educational resources. The Commission has uploaded various short, educational videos on financial literacy; links to these are provided below.

European Money Week and Beyond

What can you do to improve your financial literacy? Broaden your horizon by reading books and articles on personal finance to build a foundational understanding of money management. You can stay up-to-date on trends, policy changes, and current economic news by reading financial blogs, listening to podcasts, and reading the news. Watching short, educational videos about cover topics like budgeting, saving, investing, and debt management is quite useful. Workshops on investing, retirement planning, saving, and budgeting are provided by several organisations and financial institutions.

These events are often available both locally and online. European Money Week is an annual initiative starting on the 17th of March that aims to raise financial literacy by employing improved financial education involving young people. European Money Week is an important part of the EBF’s (European Banking Federation) goal to help people in Europe learn about money through events, publications, and partnerships.And of course, following our website and reading our articles will help you broaden your perspective and remain up-to-date on current events and insights.

I’m Benaika Kana from South Africa. I am 21 years old and am currently pursuing my BSc in Business Administration at KU Leuven in Belgium. My interest and experiences in economics, finance and business analysis has equipped me with a solid foundation within the finance sector. I have a genuine passion for continuous learning and self-improvement which I aspire to share through content creation. My academic journey has enhanced my writing skills, taught me how to critically evaluate and research extensively.