What is financial literacy?
Financial literacy – the chances are you’ve heard of it, but what exactly is it? The Organisation for Economic Co-operation and Development (OECD) defines financial literacy as ‘the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being’.
So, financial literacy is simply knowing how to stay out of debt, right? Wrong. Personal financial literacy is more than just being able to keep a bank account healthy. It is the ability to understand how money works in the world; how it is earned, how to manage it, how to invest it and how it is donated it to help others. More specifically, it refers to the knowledge that allows an individual to make informed and effective decisions with their financial resources. It involves skills like long-term vision and planning for the future, and the discipline to use those skills every day.
Financial literacy also helps individuals become self-sufficient so that they can achieve financial stability. Those who understand the subject should be able to answer several questions about purchases, such as whether an item is required, whether it is affordable, and whether it is an asset or a liability.
Quality of life is significantly affected by financial literacy. It affects the ability to provide for yourself and family, attitudes to money and investment, as well as contributions to the community. Financial literacy enables people to understand what is needed to achieve a lifestyle that is financially balanced, sustainable, ethical and responsible.
Being financially literate can help people to:
- decide how they will spend their money and meet their financial obligations
- make sense of the financial marketplace and buy the products and services best suited to their needs
- manage their personal finances and plan ahead for life events, such as home ownership or retirement
- assess the financial information and advice they receive from relatives and friends, professionals or the media, and
- maximize the use of the resources they have access to, including workplace benefits, private and public pensions, tax credits, investments, and access to credit.
Personal finance has moved beyond merely saving for a rainy day. Most banking and financial transactions now happen online and in real time, intersecting with several institutions and individuals in a matter of seconds. It also requires an understanding of how to navigate personal finance technologically at an early age, which is a necessity today.
In terms of education, financial literacy is unexplored territory. It is now increasingly common for schools to acknowledge that in order to be real world and career ready, young people need to have high levels of financial literacy. However, it is difficult for schools to consider how they will achieve this. What content should be included? What specific skills should students be equipped with? How can the curriculum and instruction engage students in real and meaningful ways? How can students understand the ways in which financial literacy applies to their immediate worlds? These are the contentious questions that need to be fully considered before making financial literacy a fundamental part of young people’s education.