Financial education is increasingly important, and not just for investors. It is becoming essential for the average family trying to decide how to balance its budget, buy a home, fund the children’s education and ensure an income when the parents retire. Of course people have always been responsible for managing their own finances on a day to day basis – spend on a holiday or save for new furniture; how much to put aside for a child’s education or to set them up in life – but recent developments have made financial education and awareness increasingly important for financial well-being.
For one thing, the growing sophistication of financial markets means consumers are not just choosing between interest rates on two different bank loans or savings plans, but are rather being offered a variety of complex financial instruments for borrowing and saving, with a large range of options. At the same time, the responsibility and risk for financial decisions that will have a major impact on an individual’s future life, notably pensions, are being shifted increasingly to workers and away from government and employers. As life expectancy is increasing, the pension question is particularly important as individuals will be enjoying longer periods of retirement.
Individuals will not be able to choose the right savings or investments for themselves, and may be at risk of fraud, if they are not financially literate. But 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 level and economic growth.
Individuals are increasingly being asked to take on sole responsibility – and assume the burden of risk – for complex savings tasks which were previously at least shared with governments or employers, such as investing for a pension or for higher education for their children. But how can individual workers or parents be expected to weigh the risks and make responsible choices in an ever more sophisticated financial market? This is true even in countries where consumers generally are familiar with financial instruments such as credit cards, mortgage loans and perhaps private saving to “top up” company pension plans. It is all the more difficult in emerging economies whose rapid development has given access to financial services to a large number of consumers, many of whom have only a limited experience with formal financial systems.
For emerging economies, financially educated consumers can help ensure that the financial sector makes an effective contribution to real economic growth and poverty reduction. But financial literacy is also crucial for more developed economies, to help ensure consumers save enough to provide an adequate income in retirement while avoiding high levels of debt that might result in bankruptcy and foreclosures. The information available on consumer financial literacy is worrying for two reasons – not only do individuals generally lack an adequate financial background or understanding to navigate today’s complex market, but unfortunately they also generally believe that they are far more financially literate than is really the case.
For further readings : http://www.oecd.org/dataoecd/8/32/37087833.pdf
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