What is Financial Literacy?
Financial literacy is understanding the connection between money goods and services.
It is the knowledge and literacy of how money works either for or against anybody. It embodies the knowledge and skills that would allow anyone make informed and efficient decisions.
Did you know that two in three people worldwide are financially illiterate?
According to authors Annamaria Lusardi, Peter von Oudheusden, and Leora Klapper.
They argued that:
“Consumers that fail to understand the concept of compound interest spend more on transaction fees, incur higher interest rates on loans, and run up bigger debts. Consumers end up saving less and borrowing more money. Financial ignorance, therefore, carries significant costs.”
In 2005, 5,300 interviews were conducted across the UK.
Four things became apparent from the survey:
- People fail to plan ahead
- People take financial risks without realising the consequence
- Debt problems can be more severe in an economic downturn
- The older generation is more financially capable than the under-40s
It concluded that if steps are not taken to improve the levels of financial capability, financial ignorance could store up trouble in the future.
This video emphasises how important financial literacy is:
In 2014, the World Bank, Standard & Poor’s, George Washington University and Gallup conducted a 5 question test and Surveyed over 150,000 adults in 148 countries.
The five questions were used to measure financial literacy, the understanding of inflation, interest, risk, and compound interest.
Find out for yourself by taking the financial literacy test.
The five questions encompasses the core understanding of finance:
- How vital risk diversification is when investing?
- Understanding the effects of inflation?
- The ability to calculate the interest on a transaction?
1. Just imagine you have some money to invest. Is it safer to put your money into investments or multiple businesses or to put your money into an investment or one business?
a. An investment or one business b. Investments or multiple businesses
2.If the prices of the things you buy double over the next ten years and your income doubles as well, will you be able to buy less than you can buy today?
a. less b. the same c. more
3.You borrow £100. Which would be the lower amount to pay back: £105 or £100 plus 3%
a. £105 b. £100 plus three percent
4.If you put money in the bank for two years and the bank adds 15%/yr to your account. Will the bank add more money, than it did in the first year, to your account in the second yr, or will it add the same amount of money in both years
a. More b. The same
5.If you had £100 in a savings account. 10 %, is added to the bank account, a year. After five years, how much money would be in the account? If money is not withdrawn from the account?
a. more than £150 b. Exactly £150 c. Less than£ 150