Think back to the very first time when you took on some of the ‘landmark’ financial responsibilities, like starting a new job and figuring out what an employer needs from you, opening your first bank account, or dealing with an inheritance that required liaison with a legal body.
Maybe you were trying to rent an apartment or purchase your first house. How confident were you during that process? Did you have someone to guide you, like a parent or friend, who could help you make informed financial decisions? How did you choose the right savings account, and what were your thoughts on interest rates?
Where did you gain this knowledge? Was it from TV, or the internet, or did you have to read up on the information somewhere else? If you’re grabbing that information from the internet how do you know what advice is good and which is bad?
Importance of Essential Financial Knowledge
Currently, financial experts are expressing concern about young people worldwide lacking the essential financial knowledge needed for adult life. Growing older doesn’t automatically fill the gaps in our financial knowledge and this can become problematic when we pass on incomplete knowledge to our children, unknowingly causing them harm.
Financial literacy plays a crucial role in most aspects of adult life, including mortgages, interest rates, savings, salaries, taxes, and more. You get the idea – it’s important. Understanding these fundamental principles properly frees young minds to make better financial decisions from the start. As Einstein once said, if you can’t explain a complex concept to a child, you probably don’t understand it well enough yourself!
This lack of financial knowledge leads to poor decision-making. Young individuals become vulnerable, they may fall prey to unreliable companies or pushy salespeople, taking unnecessary credit and agreeing to unfavorable APR conditions simply because they lack the skills to manage their money effectively. These issues can quickly spiral out of control, with one bad decision leading to another, resulting in long-lasting (sometimes permanent) damage to their credit scores and future financial prospects.
Basic Financial Questions to Reliable Decisions
A recent survey by the Financial Times revealed that young people, in particular, struggle with basic financial questions, lacking core knowledge to make reliable decisions. Areas like interest rates and inflation was found to be particularly challenging.
Even when asked to compare the cost of borrowing on a credit card and a bank overdraft, less than half of the respondents gave the correct answer. This lack of understanding was consistent across different wealth levels, ages, regions, and genders, highlighting a universal financial literacy gap.
Unfortunately, many young people leave education without knowing many of these core skills. If school curriculums are relying on parents to teach these skills and the parents of certain children are lacking in knowledge themselves… we see a dangerous cycle of ignorance repeat itself.
It’s crucial to incorporate a thorough financial literacy program into school curriculums worldwide, starting from a young age. Younger children can learn through managing pocket money, while adults can have open discussions about money around the dining table to involve and educate children early in life.
Learning Financial Literacy
Learning financial literacy at school offers more than just the ability to make better financial decisions. It can be literally life-changing for families, leading to reduced stress and improved sleep, a sense of control, stronger family cohesion, and a greater likelihood of thinking long-term and building sustainable, generational stability.
Families and peers encouraging open and honest discussions about financial options, salaries, and investment strategies can make financial literacy an integral part of growing up, similar to learning essential life skills like shaving or driving a car.
But what about those parents who never received the education they needed to pass it on to their kids?
To answer this we’re going to look at a South African case study: S. Africa boasts a well-developed and regulated, but still ‘emerging’ formal financial sector. However, the nation continues to grapple with a significant issue: Some of the lowest levels of financial literacy in a developed economy.
Despite a growing middle class, South Africa ranks very high in personal debt, with the total surging to almost 2 million ZAR (over a billion USD) from January to March this year. Along with their high levels of borrowing, the country also faces the problem of low repayment rates, with over 200 million (USD) of all borrowing currently in default.
This indicates that while financial inclusion is widespread, with most consumers having access to formal financial services, their financial literacy levels remain inadequate. Consequently, consumers are making ill-informed and often dangerous borrowing choices, leading to repayment difficulties.
This has prompted some credit lenders to become the strongest advocates of financial literacy. The CEO of the online credit provider Wonga Online, Brett van Aswegen, believes lenders should be leading the charge to take on the responsibility of promoting and enabling financial literacy for those most at risk.
Image: Wonga Online director Brett Van Aswegen
Lenders serve as crucial financial portals for many consumers, making them well-positioned to enhance consumer behavior and empower borrowers to make sound financial decisions.
While various financial education initiatives are being implemented across South Africa, many of these programs suffer from poor coordination and low participation. As a result, financially illiterate individuals continue to accumulate long-term debt and face difficulties with repayments. Mr. Aswegen proposes that lenders should identify opportunities to enhance financial literacy as a stepping stone toward financial stability.
This approach presents an opportunity for lenders to differentiate themselves as ethical and responsible institutions by willingly adopting best practices that protect and inform consumers as the primary goal.
In addition to conducting affordability assessments as mandated by South Africa’s National Credit Act, lenders can provide free resources that offer consumers a clearer understanding of their unique financial needs.
This is something Wonga have already implemented for their own customers and is, hopefully, the start of a fundamental shift in the nation’s financial literacy.