The Power of Financial Literacy

Even people who are otherwise very literate can be financially illiterate; it shows in how poorly they manage their financial affairs. Financial literacy, though, gives power to realise personal goals from short-term to long-term and plays a central role in achieving financial independence.

Financial literacy is empowering. It is the understanding of key money concepts and the ability to apply financial skills, like budgeting and saving, to make informed financial decisions for personal financial well-being. It generates the stability and confidence to achieve people’s life goals.

It is more than being able to make money. It is about working money effectively, which is reflected in the quality and effectiveness of decision-making over a sustained period and the avoidance of disastrous choices. It serves as a springboard for overall lifelong financial well-being.

Because it gives the knowledge required to manage money effectively, it also provides the means to avoid pitfalls like unmanageable debt, low savings, and poor investment decision-making.

Even more empowering than financial knowledge is the range of skills it provides, for example, budgeting, which facilitates the skill of keeping spending in line with income and generating savings for emergencies and, importantly, for investing for long-term financial growth, which is itself a critical skill.

Financial literacy, rightly appreciated, is very useful in matching financial instruments to the expected outcomes and the level of risk associated with those outcomes, plus the most suitable strategies to be employed to achieve the expected results.

Another skill that financial literacy spawns is debt management. This skill makes it possible to keep debt at manageable levels and to use other people’s funds in ways which benefit the borrower in a sustainable way. People who are educated about debt are able to avoid the debt trap by, for example, avoiding costly credit card debt. They are better able to determine if it is better to take a short-term or long-term loan and to see the link between how interest is computed and how much it costs.

Financial literacy may take time to acquire, but it has strong benefits. Because financially literate individuals are better equipped to save and invest more and with greater purpose, they are generally better able to accumulate wealth. They are better able to avoid debt and to manage it well if they do borrow. They are better able to prepare for the long term, such as for retirement, and are generally better able to withstand financial shocks in the economy. They are better able to make effective estate plans and to protect their assets and provide for their families through insurance.

A real big benefit of financial literacy is the independence it gives because the financially literate person does not have to rely too much on advisers, being generally knowledgeable about financial products and strategies and their relevance. The result: more meaningful and relevant decisions.

Although the level of financial literacy lags the general level of literacy in our country, all is not lost. There are increasing opportunities for anyone who is interested in being financially literate to achieve that goal. There are government agencies, for example, which are involved in financial education. The Financial Services Commission regulates insurance, securities and pensions, but recognises the importance of people being financially literate. Its programmes, though, tend to lean more heavily to the young.

The Bank of Jamaica also engages in financial education programmes, also with a slant to the younger members of the population, and the Ministry of Education partners with organisations for school-based initiatives on money management.

Private individuals and corporations also engage in financial education. The VM Group, for instance, offers online tools and strategies for personal financial management. Other financial institutions also offer resources in the form of printed materials, in digital form, and through seminars and workshops. The Jamaica Stock Exchange is a big provider, offering a wide range of programmes through several media for the benefit of primary school students up to adult investors.

There are others. Some employers – at their expense – provide some level of financial education to their employees. Add to this group the churches and community groups. Beyond these, there are online resources which are available, but which should be carefully evaluated before making a commitment to engage.

Although some programmes are offered without charge, others do come at a cost to the learner, mostly those offered by independent financial coaches and educators.

As useful as financial literacy is, by itself, it cannot guarantee that people will make the best financial decisions. Other factors come into play. People’s circumstances change, sometimes suddenly and dramatically. The economic climate sometimes changes sharply, although the financially literate are often better equipped to cope.

People’s decision-making is also influenced by past experiences, by family and other associations, for example, and by deep-seated behavioural biases, such as aversion to risk, fear, greed, overconfidence, and the bandwagon effect.

Developing profitable financial behaviours is achievable, and financial literacy has a key role to play, but not by itself. Who people are, their ability and willingness to make relevant changes in light of their own circumstances and the wider environment, as well as knowing what they really want, are critical.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com