Financial literacy is the ability to understand and use various financial skills , including personal financial management, budgeting, and investing. In recent years, financial products and services have become increasingly widespread throughout the society and their importance has been rising each day. Though earlier generations may have purchased goods primarily in cash, today, various credit products are popular, such as credit cards, mortgages , and student loans which form important cogs in life.
But rather staggeringly, it is important to note that most people lack knowledge in a variety of financial skills and how different financial services work. A lack of financial literacy is a problem not only in emerging or developing economies. Consumers in developed or advanced economies also are known to not have a strong grasp of financial principles in order to understand and negotiate the financial landscape, manage financial risks effectively, and avoid financial pitfalls. This is crucial because the lack of financial literacy can lead to numerous pitfalls. Financially illiterate individuals may be more likely to accumulate unsustainable debt burdens, for example, either through poor spending decisions or through a lack of long-term preparation. This in turn can lead to poor credit and bankruptcy , or other negative consequences. Furthermore, it is important to note trends in the modern world which necessitates knowledge of finances.
The financial environment is changing. Now, in a global marketplace, there are many more participants in the market which means there are innumerable factors that can influence it. The quickly changing environment created by technological advances such as electronic trading makes the financial markets even swifter and more volatile. Taken together, these factors can cause conflicting views and difficulty in creating, implementing, and following a financial roadmap. Moreover, we are spoilt with choices. Banks, credit unions, brokerage firms, insurance firms, credit card companies, mortgage companies, financial planners, and other financial service companies are all vying for assets, creating confusion for the consumer. With all of them marketing themselves, it is important to note that at a point where the consumer itself is financially illiterate, it is tremendously easy for financial institutions to scam consumers.
One must never forget that the cycle of debt starts from a very early age, inciting and feeding their reliance on student loans and credit cards. Poor money management skills beget decisions made in haste, desperation, and anxiety, leading to more debt, creating more stress-induced decision making, and so on.
Rather than teaching the skills that could prevent, or at least mitigate, bad money habits, some college campuses welcome credit card companies onto their grounds. They're more than eager to sign up an 18-year-old to a high-interest account. This calls for at the very least to protect students from this through financial education at a very early age. In USA, states like North Carolina, it is mandated by law that high school and college students must have financial literacy courses. Financial literacy is crucial to help consumers to understand financial factors and save enough to provide adequate income in retirement while avoiding high levels of debt that might result in bankruptcy, defaults, and foreclosures. Low financial literacy has left millennials unprepared for a severe financial crisis like the coronavirus pandemic, according to research by the TIAA Institute. Even among those who report having high knowledge about personal finance, only 19% answered questions about fundamental financial concepts correctly according to the same research.
Although, these may seem like individual problems, they have a broader effect on the entire population than previously believed. To understand this better, one needs to look at the financial crisis of 2008 to see the financial impact on the entire economy that arose from a lack of understanding of mortgage products (and therefore a vulnerability to predatory lending) or the lack of financial preparedness that threatened a rise in mortgages foreclosures due to job loss during the COVID-19 crisis. Financial literacy is an issue with broad implications for economic health and an improvement can help lead the way to a global economy that is competitive and strong.
It is important to analyze what it means for the most vulnerable actors. The importance of giving the poor access to financial services is now accepted wisdom. What is not appreciated, however, is how this crucial need is undermined by a lingering lack of trust in banks among the people who are most in need of these services. Many disadvantaged customers feel alienated because financial solutions are usually not tailored to their needs, and when they are, they are often not clearly explained. Knowledge and trust are significant hurdles in any financial transaction. Access to mobile phones is nearly universal, for example, yet the robust use of mobile financial services is still rare, mainly because of a lack of knowledge and trust. One of the prime causes of financial exclusion is financial illiteracy. To make successful use of financial services, people need to know enough to at least understand the basics of how to manage money. Sadly, most poor people still believe that loans are meant only for big businessmen and traders. As a result, informal—often costly—credit sources thrive among the poor, even when financial institutions offer affordable lending schemes.
Financial education is not a silver bullet. But it can be an effective tool when delivered at the right time, to the right audience, through the right channels, and in combination with other interventions. Several promising programmes have experimented with experiential learning and customized content that meets individuals’ specific needs. A new wave of research has identified many effective avenues for delivering financial education. The spread of mobile phones has opened up a vast new world of possibilities for digital delivery of content that can enhance households’ financial capability.
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