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The Curious Case of Financial Literacy

The S&P Global FinLit survey uses four simple questions to assess basic knowledge corresponding to five fundamental concepts in personal financial decision making. These are related to interest rates, compounding, numeracy, inflation and risk diversification. You can check out these questions here More than 150,000 randomly chosen adults were polled in 140 countries. Unsurprisingly, only 33% of adults worldwide can be considered financially literate with wide disparities between countries. Emerging economies showed rates of 20-40% and developed economies between 45-70%. These are statistics which cause concern because while most of the countries in the world have adult literacy rates over 80%, clearly financial literacy rates lag significantly both in developed and the developing world. This reinforces the fact that the school system has failed to educate on basic dimensions which constitute financial literacy.

We can all identify with this in different shades, we were taught simple and compound interest formulas in math but no one ever explained their relevance to how money grows or how loan repayments evolve with different types of structures. Or Inflation, it’s impact on how savings get eroded and the concept of nominal and real interest rates. I cannot recall anyone teaching me about even basic banking products like savings and current accounts or credit cards as part of the social sciences curriculum leave alone concepts like risk diversification ! Or the virtues of making budgets, savings and having long term financial goals and planning for retirement. Most of us then went through university even forgetting the simple and compound interest formulas we learnt at school and entered our careers spectacularly financially illiterate! We then stumbled on tips and tricks ranging from smart alec stock market advice to dodgy investment advisors peddling too-good-to-be-true financial products and dabbled our way into the brave new world. Most of us learnt slowly and the hard way after getting burnt and some others, completely paranoid about financial decisions, essentially just settled for keeping money in savings accounts or fixed deposits unmindful of the fact that inflation was actually depreciating their savings. Those less fortunate with their careers underwent financial stress at some point of time and got into vicious circles and debt traps and some never recovered. This is the typical Financial Literacy biography of a so-called educated person!

So what’s the way out? Can we make amends with the next generation? Policy makers globally need to take urgent note of the vital need to get children educated on financial basics in a structured fashion to ensure that in the face of increasingly frequent financial shocks that the world has been facing the millennials and the Gen-X stay focused and prudent. This calls for a globally concerted effort to standardise and make compulsory a well thought through standard financial literacy curriculum to be incorporated in school programs worldwide. Financial Literacy needs to be taken seriously by parents, educators and Governments alike.

As you are reading this, a severe stress test is already upon us. The ILO has released shocking statistics… it estimates that 1.6 billion people, roughly half of the world’s working population which works in the informal sector is at risk of losing their livelihood for an indefinite period of time due to the pandemic and the resulting lockdown. Did these people have any savings at all? How many of them will end up in a debt trap? I will leave you with these and other sobering questions. And shhh… how did you fare in the FinLit quiz?

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