Improving Financial Literacy is Essential to Guyana’s Economic Health

May 14, 2017 News

Dr. Terence Smith, Deputy Governor, Bank of Guyana

We live in an economic time when money is short and everyone is trying to find a way to do more with less. So now is a good time to reflect on the importance of financial literacy and its impact on our nation’s future financial health.

Dr Terrence Smith

As a former U.S. Federal Reserve Bank Officer and now Deputy Governor of the Bank of Guyana, I want to provide a number of generalised observations about financial literacy and why financial education is important to Guyana.
To emphasise the importance of this topic to the development of Guyana, we at the Bank of Guyana are in the process of developing a national strategy for financial literacy spearheaded by the Deputy Governor. This initiative was mandated in the National Budget Speech 2016.
Financial literacy challenges confront developing economies and advanced economies alike. For Guyana, many individuals still need better resources and targeted education to help them understand the most important issues affecting their finances. So families, schools, financial institutions and our government must play a role in promoting financial literacy to empower these individuals to handle financial resources effectively, with a view to sustainably improving their living conditions and those of their families. So the question is what is financial literacy?

What Do We Mean by Financial Literacy?
When we talk about financial literacy we are usually referring to a set of skills that allow people to manage their money wisely. Financial literacy is a broad concept that includes both information and behaviour and it is relevant for all consumers regardless of their wealth or income.
The Organisation for Economic Co-operation and Development (OECD) defines financial literacy as “the combination of consumers’/investors’ understanding of financial products and concepts and their ability and confidence to appreciate financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well being.”
At its core are individual people, the aim being to develop their financial skills and abilities to such an extent that they can make decisions independently and on a financially meaningful basis.
Broader concepts of financial literacy also assume that people will make better judgements about their financial affairs if they understand the relationship between their own finances and the wider economy. From the macro-economic perspective, a financially literate population is of major importance in terms of combating poverty.

Why Financial Literacy Matters
Without an understanding of basic financial concepts, people are not well equipped to make decisions related to financial management. People with low levels of financial literacy suffer from that lack of knowledge at every stage of their lives.
In fact, the literature indicates that people who have a lower degree of financial literacy tend to borrow more, accumulate less wealth, and pay more in fees related to financial products. They are less likely to invest, more likely to experience difficulty with debt, and less likely to know the terms of their mortgages and other loans. They also end up borrowing more and saving less money.
Alternatively, the potential benefits of financial literacy are significant. A review of the literature indicated that people with strong financial skills do a better job planning and saving for retirement.
From a social welfare perspective, it matters greatly or not how people are able to manage their financial affairs wisely and live within their means. But the benefits of financial literacy extend well beyond stronger household balance sheets to the promotion of a more resilient financial system and, ultimately to the more efficient allocation of resources within the real economy.
Best Practices in Financial Education and Awareness
Managing one’s finances is a complex set of challenges requiring a combination of skills, judgement and resources. Guyanese families must grapple with a variety of financial decisions, ranging from choosing a bank and managing various kinds of debt to planning for retirement and purchasing insurance.
Even the simplest of these decisions requires at least some basic financial knowledge and competency. The road to financial freedom requires practice and discipline. The financial literacy literature suggests the following simple steps to guide you on your journey:
1. Start saving for the future now: As is the case in Guyana to retire at age 55 or 60, one must consider how money will be available to live for the following 30+ years. It is critical to start putting money away now to prepare for the future. Even if someone can only invest a small amount of money, it is worth it in the long-run. The difference in totals at retirement can be solely due to when savings started.
2. Get into the budgeting habit: Budgeting gives you control over your money. It is as simple as monitoring how much is made and how much is spent. Monitoring spending on a monthly basis and changing the budget as life changes will allow one to take control of personal finances and free up extra money to start saving for the future.
3. Avoid debt accumulation: Avoiding debt is one of the best ways to prepare for a secure financial future. Many consumers learn that as debt builds, it becomes increasingly difficult to get out of debt. For example, knowing how to use a credit card is an important part of avoiding debt. One should only pay for things that one can afford. For those in debt, a plan should be created on how unwanted debts will be paid off.
4. Bank smart: There are many ways that you can save money while you are banking. These include monitoring fee charges, not leaving too much money in a checking account, shopping around at different banks to find the best interest rates, and using the online bill pay function if it is available.
5. Have an emergency fund: It is important to be prepared for the “just in case” aspects of life. Creating a savings account that accrues for an unexpected expense such as car repair, home repair, or needed medical expense is recommended. This account may also be needed if one is faced with being laid off.
6. Learn about investing: It will be wise to take time to learn the basics of investing. It is critical to have a foundational understanding of managing your assets and staying away from potential scams and fraudulent transactions.
7. Set goals: Setting clear, written goals for the future and making plans to accomplish them are essential. Taking the time to write down one’s goals and aspirations will really pay off.
8. Protect your assets: It is good to ensure that one has proper insurance for self protection and for assets. Car and health insurance are must haves. Gain knowledge around what insurance options you do have and the costs.
So what can be done to raise the Level of Financial Literacy in Guyana?
Our nation needs its citizens to be able to manage their financial lives well. To get there, we must make a commitment to raising the level of financial literacy among Guyanese. This is an issue with broad implications for our nation’s economic health.
As we move forward in formalising and coordinating an approach to achieving financial literacy throughout the length and breadth of the country our strategy will be guided by the following precepts:
· Financial education must start early. Children and young people must be a target group for financial education, they should be taught to use their resources properly at an early age, so as to avoid problems such as debt. Parents should engage in regular, constructive conversations about money matters to give children a solid foundation for financial wellbeing.
· Teachers need the right training to provide financial education. A survey by the National Endowment for Financial Education found that very few teachers believe they were prepared to teach personal finance to their students. Personal finance is an important life skill and equipping school children with this skill will not only help them to participate fully in society as they move into adulthood, but will also promote national development.
· One size does not fit all. Financial literacy rates vary substantially by age, race, gender, and socioeconomic status. For example, people living in rural areas are particularly vulnerable to bad uninformed financial choices. Their incomes are largely low and irregular, and thus any loss or impudent use of money has significant consequences for them. In many of the indigenous communities, even the most basic financial information is lacking.
Financial literacy matters on many levels. It helps people manage their financial affairs and improve their standard of living. But it also improves the economic health of the nation. Next week I will discuss the importance of financial literacy to the financial system. Please send your comments to [email protected]