Oran Hall | Financial literacy an investment in yourself
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER
To be financially literate is to have the financial knowledge and skills to make effective financial decisions consistently.
The financially literate knows and practices how to make, spend, save and accumulate money and is generally rewarded by achieving, to a great extent, established goals.
Financial literacy gives us a solid foundation on which to base financial decisions, that is, the decisions to take and not to take. It helps us to make responsible financial decisions and supports us in our efforts to achieve our many and varied life goals, and to give us financial stability.
Yet, many who by training and experience are presumed to be financially literate do not seem able to make effective financial decisions. Perhaps they are not financially literate, after all, having just the knowledge but not the skill or inclination to put into practice the knowledge lodging in their heads.
But it could be more than that. Perhaps they would really want to practice what they know but are inhibited by psychological factors. Past personal and family experiences, the influence of family, friends, the church, for example, can have a bearing on how we relate to money. Attitudes of greed and fear, and even lack of confidence in one’s own abilities can influence the quality of financial decision-making.
What makes it so imperative to be able to make effective financial decisions is the growing sophistication of the financial world. There are more and more financial products and services as time progresses, so it is important to have some basic understanding of the financial world to be able to make the most suitable financial decisions without being overly dependent on the professionals in the financial sector.
And, lest we forget, there is no shortage of scams – sophisticated ones too, which look like the real thing. It is not enough to depend on the regulators to expose such schemes: we all must take responsibility for the decisions we make and to be realistic about the safety of financial products and the kinds of returns that can be derived from them. The willingness to ask questions, even mentally, should be an important part of the decision-making process.
Our level of financial literacy is exposed by our ability to make and manage our personal or family budget, our ability to make basic financial calculations, simple interest for example, how we make savings and investment decisions, how we incur and manage debt, how and when we spend money and manage our bills, and how we plan for the long-term. These are just some examples.
I find it hard to understand the professed inability to professionals to make a family budget and struggle to understand how educated young people incur credit card debt without taking time to understand how credit cards work, using them with reckless abandon, thus inflicting untold suffering upon themselves when the time of reckoning inevitably arrives.
Responsible management of debt is an imperative for our time, for the emergence of credit rating agencies has changed how credit is done. People who fail to honour their debt obligations to certain lenders and service providers cannot hide under the radar any more, so they are not able to borrow as their credit history effectively becomes an open book, and they do not seem able to come up with the strategies to address their problems.
Investing in stocks is becoming quite fashionable, and nothing is wrong with that. In fact, more people need to look into that direction
My concern is that too many market participants fail to prepare themselves, and enter with the wrong attitude: to make a profit as quickly as possible. Others take positions out of line with their risk profile or, not taking time to understand the role of the stockbroker, fume when they do not get the expected tip to buy or the call to sell.
It has to be understood also that the value of money changes over time – for the worse. So we get less for the dollar as time passes and well-laid plans made in the past but not adjusted to reflect changing realities eventually fail to materialise.
Many people manage their own money, so they must be able to have the confidence to do so. Ignorance is not bliss: we cannot afford to be unaware because the consequences can be dire.
Financial literacy should start at home. Parents should teach their children by instruction and, very importantly, by example, so they must be financially literate themselves. The education system also has a role, so does the church. It is not too much to ask employers to play a role, for how productive can employees be when foremost on their minds is their financial woes?
Personal responsibility, though mentioned last, is not to be considered as the least. What is required most is time.
There is no shortage of resources and media. The newspapers, radio, television, magazines, books, the internet, which provides so many different avenues for learning for people with various learning styles, and financial courses are readily available sources of financial literacy, the only caveat being that not all of the information provided is reliable.
Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.