Financial Literacy: Young People and Numeracy (Part 1)

Sep 10, 2017 News

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Dr. Terence Smith, Deputy Governor, Bank of Guyana

Understanding financial literacy and financial concepts
Exposing young people to financial concepts is particularly important. The earlier that young

people can develop basic financial skills, the more likely it is that they will make good financial decisions when they become adults. According to the research literature, “there is an undisputed link between the need for adequate basic skills in numeracy and literacy and financial literacy.” Financial literacy is generally defined as, “being able to make informed judgements to take effective decisions regarding the use and management of money.” A lack of financial literacy and numeracy is often the direct result of poor basic skills.
The key objective of this article is to raise awareness to numeracy and financial literacy. All young Guyanese as well as most adults must be able to use mathematics at a level necessary to function and progress at work and in life. The world requires us all to have a high level of competence in basic numeracy skills. In fact, financially capable people are able to make informed decisions. They are numerate and can budget and manage money effectively. Studies have shown that they understand how to manage credit and debt as well as assess and manage the different risks and returns involved in investment options.
Being numerate means more than just being able to use addition, subtraction, multiplication and division. As the world advances, we have to understand complex information presented in financial charts, deal with percentages and solve time management problems. Numeracy covers the ability to understand and use mathematical information and interpret results and communicate mathematical information.
During my research for this article focusing on numeracy alone, it was noted there are several studies documenting its impact on important financial decisions. In fact, two researchers, Lusardi and Mitchell found that those individuals who cannot do a 2% interest rate calculation (i.e., respond with “do not know”) are much less likely to plan for retirement and be successful planners (i.e., figure how much they need to save, develop a plan, and stick to a plan). Moreover, those who are not numerate are less likely to accumulate wealth. However, this finding is not specific to the United States, but it is true in many other countries. Another interesting finding is that those with higher numeracy are much more likely to own stocks.
Basic numeracy skills requirements
The Government of the United Kingdom has prepared the following table that displays key basic numeracy skills:

 

 

United States and other countries have implemented studies and surveys that show the level of numeracy among their populations to be very low. In fact, one particularly interesting piece of research shows that, “the lack of numeracy is not only widespread but particularly severe among some demographic groups, such as women, the elderly, and those with low educational attainment.” This has potential consequences for individuals and for society as a whole because numeracy is found to be linked to many financial decisions. The basic financial literacy and financial questions are as follows:
1. Numeracy – Suppose you had $100 in a savings and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
2. Compound Interest – Suppose you had $100 in a savings account and the interest rate in 20% per year and you never withdraw money or interest payments. After 5 years, how much would you have on this account in total?
3. Inflation – Imagine that the interest on your saving account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
4. Time Value of Money – Assume a friend inherits $10,000 today and his sibling inherits $10,000 3 years from now. Who is richer because of the inheritance?
5. Money Illusion – Suppose that in the year 2016, your income has doubled and prices of all goods have doubled too. In 2016, how much will you be able to buy with your income?
Concluding remarks
It must be noted that people of all ages must be capable of making effective financial decisions. Based upon global economic and social trends young people must be equipped with the skills to make sound decisions, from a young age. This includes basic commercial transactions as well as transactions including the costs of tertiary or further education or training and choosing from a complex array of available financial products and services.
According to Lusardi, there are high returns to improving numeracy and teaching mathematical skills in school and among the young. Such skills can be used not only in the job market but also in making good financial decisions throughout one’s lifetime. Not only are young people required to make one of the most important decisions of their lifetime, whether to invest in higher education during high school, but according to the research, they are also confronted with numerous decisions of economic consequence: having a car, a cell phone, a bank account, and a debit or credit card.

Next week we will continue more on financial literacy and numeracy. Thanks for all your comments and support. As usual, please send your comments or questions to deputygovernor@bankofguyana.org.gy

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