Home » Business » Embracing the Concept of Financial Literacy [column]

What is financial literacy?

Financial Literacy is the ability to use financial knowledge and skills to manage financial resources effectively to improve an individual’s financial well-being.

This should be taken as a long-term behavioural change initiative requiring a number of approaches so as to bring about gradual improvement. Financial literacy is important in the life journey of everyone, be they in primary school, secondary school, tertiary level, whether employed or unemployed. Financial literacy is more about making thoughtful and informed decisions about your finances.

Why is there a big interest in financial literacy?

In the modern world society, financial literacy is an essential everyday life skill which allows every global citizen to understand and negotiate the financial landscape, manage money and financial risks effectively and avoid financial pitfalls.

The burden of making correct and sound financial decisions is now resting on the shoulders of consumers. The financial environment is changing fast every day. On a daily basis, news channels and newspapers are awash with stories about bull markets, bear markets, rising interest rates, falling interest rates, financial austerity among other complicated terms. The ability to comprehend these issues and make informed decisions out of them requires someone who is financial literate.

Further, the financial options available to the consumers continue to increase the number of credit card options are increasing, number of investment options are also increasing and this is further complicated by the increasing multiplicity of financial services providers. Banks, credit unions, insurance firms, building societies, financial planners, and others are all trying to get your business, increasing the potential of you falling into financial pitfalls.

How can consumers be sure that they are not easily duped?

Be as informed as you can be about your finances. After all, you are the one who is going to have to live with your decisions.

Try to find a financial institution or financial aisor that is knowledgeable, that you can trust, and with whom you can work comfortably. They cannot make all your decisions, but they should be able to help you put your situation into perspective and help you evaluate your options.

Try to develop good financial habits. Just paying attention to how you spend your money will probably lead to some ideas about how to save more. Over time, your savings can make a large difference in your future financial lifestyle.

Do the easy things. Starting to save early for a college education, enrolling for direct deposit of your pay-check, and using some form of automatic saving plan will help you accumulate funds. In addition, you will know you are taking positive actions.

Try to develop a financial plan of some sort. It does not have to be complicated or extensive. In fact, you may want to tackle one part of your finances at a time, such as looking at all your insurance needs. Breaking up a financial plan into smaller, workable pieces can make it easier to create.

Research credible sources. Your personal relationship banker or financial aisor could be the great places to start.

Benefits of financial literacy

Improving financial literacy can benefit anyone, regardless of age, income or background to make informed choices on a daily basis throughout their lives.

Financial literacy is a key contributor to improving financial well-being. However, it must be supported by other complementary factors. Depending on circumstances, these factors may include financial inclusion, access to suitable financial products, and appropriate consumer protection and financial services regulation to ensure fair and efficient financial markets.

Improving the financial literacy has a beneficial flow-on effect to the broader economy, increasing levels of enterprising financial behaviour and greater participation in financial services and markets by confident and informed consumers and investors.

Financially literate consumers and investors are more likely to make effective financial decisions and less likely to choose unsuitable products and services. Strengthening the ‘demand’ side of the market contributes to a sustainable business for financial service providers and helps reduce the incidence of poor consumer outcomes.

A base of financially literate consumers and investors, in combination with efficient financial markets, also potentially reduces the degree of regulatory intervention required.

If individuals do become financially educated, they will be more likely to save and to challenge financial service providers to develop products that truly respond to their needs, and that should have positive effects on both investment levels and economic growth.

Individuals will be able to choose the right savings or investments for themselves, and avoid being at risk of fraud, if they are financially literate.

Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. He can be contacted on abel@baz.org.zw ltmailto:abel@baz.org.zwgt or on 04-744686, 0772463008.

Source : The Herald