The importance of Financial Literacy

It’s simple math: competence, especially in finance, saves money. Ignorance, by contrast, costs dearly. There certainly is a lot of catching-up to do in the field of financial literacy, for kids and adults alike.
Financial literacy saves money. In other words: according to the demographic researchers Annamaria Lusardi and Olivia Mitchell every individual bears the costs of his or her financial ignorance. Those unfamiliar with financial matters are more likely to take out a loan, tend to save less and generally pay higher fees for financial products. Since the financial crisis, many governments have introduced national strategies to improve the economic education of their citizens. Since 2008 the OECD (Organization for Economic Cooperation and Development) has been more active in promoting the issue on an international level with the help of the International Network on Financial Education.

Since then, the question of how we can develop financial literacy in general has been discussed again and again. What is the best way to set up effective financial literacy programs? At what age should children ideally start learning about all things finance and how can they continue to do so once they become adults?

"Financial literacy is important at all stages of life", says Brigitte Miksa, head of the International Pensions team at Allianz. "In view of the demographic development and increasing tightening of state finance reins in many countries across the globe, it is essential that we make provisions for our old age ourselves. A society that is not sufficiently prepared to make far-reaching financial decisions is on the brink of social problems".

Being able to make decisions to ensure financial wellbeing
We have a lot of catching-up to do when it comes to young people; they don't know a lot about dealing with bank accounts, credit cards, interest rates, saving, risk and revenue. A PISA study carried out by the OECD (Organization for Economic Cooperation and Development) in 2014 dug deeper for the first time and identified considerable gaps in knowledge. On average, 15 percent of those surveyed did not even show correct basic knowledge.

"It is incredible how poorly young people are equipped for modern life. We need to act, no doubt about that", says Miksa. "Only once they know how interest rates, for example, or products such as investment funds and insurance work, once they are able to weigh up the risks and opportunities, will they be able to get clued up and make decisions which ensure their financial wellbeing." However, as she points out, a look beyond the PISA study shows that adult financial literacy is not in good shape. According to earlier OECD investigations, there's a lot of potential for improvement in many countries around the globe. These investigations are testimony to the fact that women, in particular, have some catching-up to do.

Early educational initiatives as a solution?
There is some controversy among experts as to whether financial literacy from an early age can contribute to solving the problem. Whilst some believe that governments, regulators and the financial industry need to do a great deal for the financial literacy of children and young people, since this is the only way for the latter to learn suitable patterns of behavior, others insist that this approach is doomed to fail from the outset.

Miksa cuts to the chase: "We are all aware that we don't always make good and right decisions. But fundamentally, it is important to equip people with the right tools to make informed decisions about their finances." This means that ultimately, a better understanding of economic issues benefits everyone: individuals, society and the political and economic community.
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