Low financial literacy and the link to debt

 

BY ADAM MUSSA –

To be able to participate effectively in the modern global economy, it’s essential people have access to financial services they can use confidently. At school, being numerate is enough. We are taught to add, subtract, multiply and divide, and possibly even solve the occasional simultaneous equation on a really good day. However, in the modern world, the ability to understand more complex information is essential.

When making important financial decisions, we are increasingly required to consult charts and graphs, understand percentages and be able to budget effectively, but very few of us are properly equipped to do so.

Financial literacy has a significant role to play in wealth inequality. Numerous studies have found that money management skills, and the lack thereof, are proportionate to consumer debt and household net worth.

The reality is that the ability to balance income with day-to-day living expenses, plan ahead for future needs and unexpected risks, and calculate the most cost effective method of borrowing to fund major purchases is something we struggle to do. The result is that an increasing number of people are getting into financial difficulty at a younger age.

Understanding debt

A recent survey carried out by online loan website Wonga South Africa into the financial literacy of over 18,000 respondents, asked people to distinguish between ‘good debt’ and ‘bad debt’. The participants were asked what they would consider getting into debt for. The results found that 83.7 percent would be willing to access credit to buy a house, while 58.6 percent said would be willing to get into debt to fund a university education. These are examples of ‘good debt’.

At the other end of the scale, there are those who are prepared to dabble with the ‘not quite so good debt’, with 5 percent of the respondents willing to borrow to pay for a holiday, while 4.5 percent were happy to use credit to keep up with the latest gadgets, technology and fashions.

Low financial literacy amongst students

Perhaps a more alarming study was carried out in Australia. It found the financial literacy of those under the age of 25 to be surprisingly low. The survey canvassed the opinions of university students, who you might imagine to have a firm grasp of the basics, and asked for their understanding of areas of financial importance, such as budgeting, saving and managing debt.

Although the students rated their understanding of budgeting and saving as reasonably high, they struggled when they were asked to put that understanding into practice. 55.4 percent of the respondents believed they had a good understanding of budgeting, while 66.7 percent reported a firm grasp of saving. However, only 4.4 percent were able to correctly calculate how long it would take to save an amount of money given a simple list of income and expenditure.

The financial literacy to function in today’s world

It’s clear that people with poor financial literacy skills will find it increasingly difficult to function in today’s society. Competition is fierce, and new financial products and services are being released all the time. Without the skills, knowledge and capabilities to compare and evaluate financial products and services, levels of debt, particularly amongst the young, can only be expected to rise.

 

 

 

 

 

 

 

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