Our own experiences in Jamaica illustrate why financial literacy is gaining acceptance globally as a core skill for operating in the financial environment.
Persons are living longer and are being required to take more responsibility for their financial well-being, particularly in retirement, economic conditions are getting more challenging, investment yields are declining, although the choice of products is increasing and products are getting more complex, and there is no shortage of persons and institutions ready to take unfair advantage of the less knowledgeable.
I will share with you the findings of the National Literacy Baseline Survey in Jamaica, funded by the Financial Services Commission in 2012 to measure financial literacy in Jamaica, using the Organisation of Economic Cooperation and Development/International Network on Financial Education core questionnaire, which was developed to capture the financial literacy of people from different backgrounds in a wide range of countries.
It was randomly administered to individuals in each parish. These findings were reported by Chiara Monticone and Adele Atkinson.
For the purpose of this survey, the definition of financial literacy used was "the combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being".
The results focused on levels of financial knowledge, the range of financial behaviours exhibited and attitudes towards long term planning.
The report mentioned that financially literate persons should have a basic knowledge of certain key financial concepts and the ability to apply numeracy skills in financial situations.
Beyond that, there is a positive relationship between financial knowledge and financial behaviour, as was confirmed by the Jamaican survey and surveys in 14 other countries which were part of the pilot: persons who had high knowledge scores tended to have high behaviour scores.
The survey showed Jamaicans scoring high on the knowledge of interest on loans (89 per cent), risk and return (80 per cent), the definition of inflation (85 per cent), but low on more complex issues like compound interest (14 per cent) and the time value of money (46 per cent).
Overall, 47 per cent of respondents were able to answer six or more of the eight knowledge questions correctly, thus ranking Jamaica above five countries and below nine of the countries which conducted a similar survey.
Financial behaviour is the most important element of financial literacy.
Positive financial behaviour drives positive outcomes such as planning expenditure and building a financial safety net.
Negative behaviours such as overusing credit can reduce well-being. Jamaicans recorded high scores on saving actively (80 per cent), considering when they can afford something before making a purchase (85 per cent), and keeping close watch on their personal financial affairs (76 per cent).
Whereas 72 per cent reported that they did not borrow to make ends meet and 68 per cent paid bills on time, 66 per cent made attempts at taking informed decisions.
The two weakest areas were budgeting and making financial product choices after shopping around and using independent information and advice.
Of the persons who personally or jointly had responsibility for household finances, 38 per cent reported that they budgeted, and 8 per cent of persons shopped around and sought independent help before buying financial products.
Compared to the respondents in other countries, Jamaicans were good at planning long term, saving actively and attempting to choose a financial product appropriately, but were behind in short-term money management, as reflected by their approach to paying bills.
By 57 per cent achieving high scores in six or more of eight questions, Jamaica ranked above eight countries, below five, and was at the same level as one in terms of financial behaviour.
Attitudes point to future behaviour: negative attitudes to savings for the future may signal a disinclination to save for the future. Prioritising short-term wants over long-term security is unlikely to lead to providing for emergency savings or making long-term plans.
A positive attitude towards the long term is more likely to lead to behaviours consistent with achieving long-term goals.
There is a positive relationship between attitude and behaviour, thus attitudes which tend towards short-term gratification result in lower behaviour scores.
By 63 per cent of Jamaicans having a high attitude score, that is, more than three out of five, Jamaica placed above nine countries, below four and on par with one.
Overall, when the scores were combined, 25 per cent of Jamaicans had high scores in all three components, knowledge, attitude and behaviour, and 15 per cent had no high scores.
Although the survey showed strengths in several areas, overall, Jamaicans need to raise their level of financial literacy, that is, to develop a high level of financial knowledge and positive financial attitudes leading to positive financial behaviours, to be able to improve their financial well-being.
The goal should be to attain high scores in all three.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning. Email email@example.com