Why Financial Literacy Matters

Aug 13, 2017 News

---

Dr. Terence Smith, Deputy Governor, Bank of Guyana

The money problem
From time to time, we must refresh our thinking about the things that are important in our lives. For most people, the number one problem is money. In fact, most problems are money problems. There is a 17th Century Proverb that states, “If money be not thy servant, it will be thy master.”
Furthermore, the financial literacy literature informs us that most people are living from paycheque to paycheque. Such financial worries exact a high toll which people often pay all of their lives. Health, personal relationships, and professional activities all suffer when there are financial burdens.
Just last week, someone asked me the questions, “Does Financial Literacy matter? Will it have any effect on how Guyanese make financial decisions?” There is one thing that we do know, “To bring your ambitions and desires to fulfilment, you must be successful with money.” However, before delving into the questions, we must discuss some definitions and contextual matters relating to “Financial Literacy”, since it means different things to different people.
What do we mean by Financial Literacy
As discussed in a previous article, 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 and income. 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 have trouble 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. However, 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.
The troubling aspects of Financial Literacy
The global financial crisis of 2008 highlighted a number of deficiencies with financial products. All of the research pointed to the fact that the crisis was primarily caused by deregulation in the financial industry. Specifically, Banks were permitted to engage in hedge fund trading with derivatives; subsequently demanding more mortgages to support the profitable sale of these derivatives. After interest rates resets from both the Federal Reserve and the Banks, housing prices started falling as supply out-paced demand. As a result, the trapped homeowners could not afford the payments and could not sell their homes.
In a 2013 article by Helaine Olen of the Guardian, she states that with respect to banks advocating for financial literacy after the crisis, “It promotes the false equivalence that the victims of the financial shenanigans of the past several years are as responsible for the financial crisis as the financial services sector, the ultimate creator of all those financial products of mass destruction.”
With these situations in mind, the question should be, “How helpful is financial literacy?” Well, the financial literacy literature informs us that, managing one’s finances is a complex set of challenges requiring a combination of skills, judgement and resources.
So what can we do to raise the level of Financial Literacy in Guyana
In the case of Guyana, families must grapple with a variety of financial decisions; these are not as complicated as those in advanced economies but just as troubling, ranging from choosing a bank and managing various kinds of debt to planning for retirement. Even the simplest of these decisions requires at least some basic financial knowledge and competency. The road to financial freedom requires practice and discipline.
Our nation needs 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 must 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, 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. It also improves the economic health of the nation.
Next week we will discuss King Solomon’s financial wisdom. Thanks for all your comments and support. As usual, please send your comments or questions to [email protected]

---

---