A Comprehensive Approach to Financial Literacy is Needed
It may seem like an obvious statement, but the subject of financial literacy is a universal one.
In our increasingly globalised world, how you teach people to manage their finances successfully has become a keen area for debate.
This time of the year is a particularly fertile one for discussion, with newspapers running stories on how much debt we racked up on our credit cards in December and lifestyle gurus telling you that NOW is the time to take control of your life and set those resolutions that will see you enjoy a prosperous year ahead.
We keep a keen eye on all that gets said on such matters but it’s clear to us that there is still much confusion due to the fact that there is no simple, universally-agreed definition of what financial literacy actually represents.
- knowing how to open a bank account?
- knowing how to make (and stick to) a budget?
- knowing how to put your money to work for you, so that you can increase your wealth?
- knowing, in the simplest terms, what you can, or cannot, afford?
Or any one of a hundred other suggestions?
In the last couple of weeks, we’ve listened to a South African podcast that claimed financial literacy was about knowing how to fill out financial forms correctly, read a US blog that stated it was about knowing how to use and manage credit successfully, and heard a UK TV pundit argue that it was about not getting into debt at all.
No wonder people struggle to teach the subject well, when there is no common agreement as to what financial literacy actually represents!
A 2015 report from PWC and the George Washington University Global Financial Literacy Excellence Center looked at the financial affairs of well over 5,000 people aged 23-35 to ascertain what their financial capability was. You don’t need to worry about what they mean by ‘financial capability’ (or even what GWU means by ‘Global Financial Literacy Excellence’) because one short but incredibly astute quote by Annamaria Lusardi, (Academic Director, GFLEC) included in the report highlights the problem perfectly:
Millennials owe a lot. They know too little. Millennials’ struggle with debt may eventually become our problem, too.
Any parent with their 30 year old children still at home knows that the problem is already theirs, so it really is an urgent problem that needs tackling right now. That means helping those ‘millenials’ who are now struggling with the responsibilities of adulthood and, simultaneously, preparing the current generation of school pupils to be better able to tackle the problems that lie in wait for them.
The lack of a clear definition of financial literacy is, in part, because it covers so many areas. Because of this, is essential that any educational approach to the subject takes a comprehensive, not abstract, approach. We need to be able to see that the connections between the money we earn through work; what we need to pay out to live; how we find somewhere to live; and how the government affects the money we have available to spend.
Only by joining these dots can you really help someone to become financially literate. It would certainly help if everyone had some understanding of how to budget, and to understand what they can do to change their income and outgoings, but beyond those very basic concerns, financial decisions become very much an individual matter.
Some people will go through life never borrowing anything. Others will use credit continually to help them or their business. There are people who will make the case for and against both approaches but financial literacy always come down to this – are you able to understand the decisions that have a positive impact on your financial affairs, rather than those that would make your situation worse?
Understanding your financial responsibilities and being aware of all the areas in which you can exert control is what makes you financially literate. How you use that knowledge is then up to you but, if you’re not armed with that information to begin with, you’re starting out burdened with a problem far greater than any amount of debt you may accrue.