How to make better money decisions
Improved financial literacy, according to studies conducted by a range of experts, has a resounding impact on our economic decisions. What are you waiting for?
The 2021 Progress in International Reading Literacy Study, which revealed that four out of five South African grade 4s are unable to read for meaning, got me thinking about the financial literacy levels of South Africans.
Financial literacy is defined as the ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt and pensions. This knowledge should be evident in how we save, invest and take on debt.
A popular TV show, I Blew It, shows how people who have come into money through Road Accident Fund payouts, Lotto winnings, inheritance or other means spend their windfalls within a short time. Surely financial literacy would have helped them make better decisions?
To ascertain the level of financial literacy in South Africa, I turned to a 2018 study by the Human Sciences Research Council for the Financial Sector Conduct Authority, the aim of which was to determine the level of financial literacy in the country.
The study looked at financial knowledge and attitudes and focused on four domains: financial control; choosing and using appropriate financial products; financial planning; and knowledge and understanding.
The study shows that a considerable portion of the adult population are not sufficiently financially literate and, inevitably, find fiscal matters challenging. The groups with the highest level of financial illiteracy are young people, the uneducated and the poor.
Yet the financial capabilities of certain groups — particularly the middle class — have worsened over the period of the study too.
This matters because financial literacy is inherently tied to our personal economic decisions. According to a report by Annamaria Lusardi and Olivia Mitchell, households with high financial literacy do better in financial and retirement planning, perform better in credit card usage and in how they deal with debt.
There is also evidence showing a strong relationship between financial knowledge and the likelihood of engaging in desirable financial practices: paying bills on time, tracking expenses, budgeting, paying credit card bills in full each month, saving a portion of income earned, maintaining an emergency fund, diversifying investments and setting financial goals.
Low financial literacy levels can be seen in poor financial decisions in equity investment, debt financing, and long-term retirement planning, and these decisions can lead to a decrease in financial welfare.
So how do you improve your financial literacy?
A simple start is to understand where your money is going. Then, understand how inflation affects your purchasing power.
Understand how a credit profile and credit score affect the interest rate you will pay on any facilities held with lenders.
Then move up to how compound interest works and how various assets — such as property, shares and unit trusts — may earn you a return.
These lessons may be learnt through conversations with your peers, your family or your colleagues, through financial media such as the FM, or programmes about money such as those hosted by personal finance veterans such as Maya Fisher-French.
The literature and the learnings are all out there.