Financial literacy

Financial literacy refers to the set of skills and knowledge that allows an individual to make
informed and effective decisions with all of their financial resources. Raising interest in
personal finance is now a focus of state-run programs in countries including Australia,
Canada, Japan, the United States and the United Kingdom

The Organization for Economic Co-operation and Development (OECD) started an inter-
governmental project in 2003 with the objective of providing ways to improve financial
education and literacy standards through the development of common financial literacy
principles. In March 2008, the OECD launched the International Gateway for Financial
Education, which aims to serve as a clearinghouse for financial education programs,
information and research worldwide. In the UK, the alternative term "financial capability" is
used by the state and its agencies: the Financial Services Authority (FSA) in the UK started a
national strategy on financial capability in 2003. The US Government also established its
Financial Literacy and Education Commission in 2003.

International findings

An international OECD study was published in late 2005 analysing financial literacy surveys
in OECD countries. A selection of findings included:

In Australia, 67 per cent of respondents indicated that they understood the concept of
compound interest, yet when they were asked to solve a problem using the concept
only 28 per cent had a good level of understanding.
A British survey found that consumers do not actively seek out financial information.
The information they do receive is acquired by chance, for example, by picking up a
pamphlet at a bank or having a chance talk with a bank employee.
A Canadian survey found that respondents considered choosing the right investments
to be more stressful than going to the dentist.
A survey of Korean high-school students showed that they had failing scores that is,
they answered fewer than 60 percent of the questions correctly on tests designed to
measure their ability to choose and manage a credit card, their knowledge about
saving and investing for retirement, and their awareness of risk and the importance of
insuring against it.
A survey in the US found that four out of ten American workers are not saving for
retirement.

"Yet it is encouraging that the few financial education programmes which have been
evaluated have been found to be reasonably effective. Research in the US shows that workers
increase their participation in 401(k) plans (a type of retirement plan, with special tax
advantages, which allows employees to save and invest for their own retirement) when
employers offer financial education programmes, whether in the form of brochures or
seminars."

However, academic analyses of financial education have found no evidence of measurable

success at improving participants' financial well-being.

According to 2014 Asian Development Bank survey, more Mongolians have expanded their
financial options, and for instance now compare the interest rates of loans and savings
services through the successful launch of the TV drama with focus on the fiscal literacy of
poor and non-poor vulnerable households. Given that 80% of Mongolians cited TV as their
main source of information, TV serial dramas were identified as the most effective vehicle
for messages on financial literacy.

Additionally, a growing number of financial literacy researchers are raising questions about
the political character of financial literacy education, arguing that it justifies the shifting of
greater financial risk (e.g. tuition fees, pensions, health care costs, etc.) to individuals from
corporations and governments. Many of these researchers argue for a financial literacy
education that is more critically oriented and broader in focus; an education that supports
individuals better understand systemic injustice and exclusion rather than one which
understands financial failure as an individual problem and the character of financial risk as
apolitical. Many of these researchers work within social justice, critical pedagogy, feminist
and critical race theory paradigms.

What is 'Financial Literacy '

Financial literacy is the education and understanding of various financial areas. This topic
focuses on the ability to manage personal finance matters in an efficient manner, and it
includes the knowledge of making appropriate decisions about personal finance such as
investing, insurance, real estate, paying for college, budgeting, retirement and tax planning.

BREAKING DOWN 'Financial Literacy '

Financial literacy also involves the proficiency of financial principles and concepts such as
financial planning, compound interest, managing debt, profitable savings techniques and the
time value of money. The lack of financial literacy may lead to making poor financial choices
that can have negative consequences on the financial well-being of an individual.
Consequently, the federal government created the Financial Literacy and Education
Commission, which provides resources for people who want to learn more about financial
literacy.

The main steps to achieving financial literacy include learning the skills to create a budget,
the ability to track spending, learning the techniques to pay off debt and effectively planning
for retirement. These steps can also include counseling from a financial expert. Education
about the topic involves understanding how money works, creating and achieving financial
goals, and managing internal and external financial challenges.

The Importance of Financial Education

Financial literacy helps individuals become self-sufficient so that they can achieve financial
stability. Those who understand the subject should be able to answer several questions about
purchases, such as whether an item is required, whether it is affordable, and whether it an
asset or a liability.

This field demonstrates the behaviors and attitudes a person possesses about money that is
applied to his daily life. Financial literacy shows how an individual makes financial
decisions. This skill can help a person develop a financial road map to identify what he earns,
what he spends and what he owes. This topic also affects small business owners, who greatly
contribute to economic growth and stability.

Financial illiteracy affects all ages and all socioeconomic levels. Financial illiteracy causes
many people to become victims of predatory lending, subprime mortgages, and fraud and
high interest rates, potentially resulting in bad credit, bankruptcy or foreclosure.

The lack of financial literacy can lead to owing large amounts of debt and making poor
financial decisions. For example, the advantages or disadvantages of fixed and variable
interest rates are concepts that are easier to understand and make informed decisions about if
you possess financial literacy skills. Based on research data by the Financial Industry
Regulatory Authority, 63% of Americans are financially illiterate. They lack the basic skills
to reconcile their bank accounts, pay their bills on time, pay off debt and plan for the future.

Financial literacy education should also include organizational skills, attention to detail,
consumer rights, technology and global economics because the state of the global economy
greatly affects the U.S. economy.