With job losses all around, we need to get rid of financial illiteracy

It’s time that the next generation gets its lessons right

The S&P Global FinLit survey uses four simple questions to assess basic knowledge corresponding to five fundamental concepts in personal finance decisionmaking. These are related to interest rates, compounding, numeracy, inflation and risk diversification.

More than 150,000 randomly chosen adults were polled in 140 countries. Only 33 per cent of adults can be considered financially literate. Emerging economies showed rates of 20-40 per cent and developed economies between 45-70 per cent.

These statistics cause concern because while most of the countries have adult literacy rates over 80 per cent, clearly financial literacy rates lag significantly. This reinforces the fact that the school system has failed to educate on the basic dimensions of financial literacy.

Superficial awareness

We can all identify with this in different shades. We were taught simple and compound interest formulae 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 basic banking products like savings and current accounts or credit cards as part of the social sciences curriculum, leave alone concepts like “risk diversification”.

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?