The S&P Global FinLit survey uses four simple questions to assess basic knowledge corresponding to five fundamental concepts in personal finance decision-making. These are related to interest rates, compounding, numeracy, inflation and risk diversification.
More than 150,000 randomly chosen adults were polled in 140 countries. Unsurprisingly, only 33 per cent of adults can be considered financially literate with wide disparities between countries. Emerging economies showed rates of 20-40 per cent and developed economies between 45-70 per cent.
These are statistics which cause concern because while most of the countries have adult literacy rates over 80 per cent, clearly financial literacy rates lag significantly in both the developed and developing world.
This reinforces the fact that the school system has failed to educate on the basic dimensions that constitute financial literacy.
Only a superficial awarenessWe 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.
When it comes to inflation, how savings get eroded and the concept of nominal and real interest rates apply. 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 in a state of downright financially illiteracy.
Many distractions
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 this brave new world. Most of us learnt slowly - and the hard way - after getting burnt and some, completely paranoid about taking financial decisions, essentially just settled for keeping money in savings accounts or fixed deposits unmindful of the fact that inflation was actually depreciating those savings.
Those less fortunate with their careers underwent financial stress at some point in time and got into and debt traps they never recovered from. 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? Policymakers 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 the world has been facing, the Gen-X can stay focused and prudent.
This calls for a concerted effort to standardize and make compulsory a well-thought through standard financial literacy curriculum to be incorporated in school programmes.
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 (International Labour Organisation) has released shocking statistics - it estimates that 1.6 billion people, roughly half of the world’s working population working in the informal sector, is at risk of losing their livelihood for an indefinite period due to the pandemic and the resulting lockdowns.
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.
By the way, how did you fare in the FinLit quiz?
- Venkat Sarma is a banking and financial services risk management professional.
