contributed by John Mason
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Education is knowledge. It helps people gain skills they can use to improve their lives, which in turn boosts the economy. In third-world countries, where fewer people receive an education, poverty is rife, and most people never achieve their potential.
Math and literacy skills are the foundation stones of a good education but don’t underestimate the importance of financial literacy. Being able to make financially responsible decisions has a far-reaching effect on our lives and the lives of those around us. Indeed, one could argue that the global financial crash of 2009 was, in part, caused by individuals in positions of power making financially irresponsible decisions.
The Perils of Uncontrollable Spending
On a personal level, a lack of financial literacy will probably lead you into debt. This is not great for you, but if you are in a position of responsibility, perhaps in charge of your family’s finances, or even in a job where you are required to manage money, it could be disastrous.
Let’s use Dennis Kozlowski, CEO of Tyco, as an example. Kozlowski’s financial incompetence knew no bounds. Whilst he was good at his job, he soon realized it was helpful if the company picked up the tab for his personal spending. He used company money to fund a $19 million NYC apartment and spent a further $11 million on furnishings. He also granted himself unauthorized bonuses and charged a $2 million birthday party to the company. But, the good life eventually unraveled. In the end, tax evasion was his undoing and he ended up in prison.
Most people don’t commit major financial fraud or end up doing time in jail because of financial incompetence but making poor money decisions could easily lead to credit card debt, escalating pay day loans, and the bank foreclosing on your home. None of these scenarios is especially attractive, which is why a good financial education is a smart investment.
What is Financial Literacy?
At its most basic level, financial literacy means being able to understand how to budget, plan for your retirement, and avoid debt, whether you live in London or Nairobi. On a more sophisticated level, someone with a high degree of financial literacy might have success trading in forex or stocks.
Whilst a lack of financial education is a real problem in the developing world, it can also be problematic in developed countries too. An OECD study published in 2017, focussing on 15-year-olds in 15 different countries, found that only 22% of teens had basic financial literacy. Chinese teens have far less money to spend than European or American kids, but they scored much higher on financial literacy. Interestingly, the US ranks below Canada, Belgium, and even Australia, where kids are far more likely to understand the fundamentals of short-selling Australia or compound interest.
Amazingly, financial literacy is rarely taught in school. A college student can spend three years studying the intricacies of molecular biology, earning a first-class honors degree, and still remain dangerously clueless about the merits of balancing a household budget. But, without this knowledge, you will struggle to build wealth and attain a high degree of financial security in the future.
The OCED study recommended that children are taught financial literacy in school. As financial products become increasingly complex and kids have ever-greater choices over which products they buy, it is imperative that they learn the basics in school. Arguably, parents should be teaching their children about financial topics, but may parents are themselves financially illiterate.
Educating Kids about Money and Finance
Most kids learn the art of saving when they receive pocket money. The days of piggy banks are largely in the past and modern kids are more likely to be given a credit card with a spending limit, but it’s essential that you tutor your children about budgets, credit, and how to save and invest for the future. If kids are not armed with this knowledge, their poor decisions in the future might even contribute to the next financial crash.
In summary, financial education is a long-term investment in human capital that will make a real economic difference for future generations.