No crisis has revealed the benefits of basic financial literacy. A large number of households have entered the pandemic, unprepared to withstand the financial shock, let alone one of the proportions of COVID-19. This finding dates back to 2007 when people were tempted to buy a house beyond their needs and finances and then realized that it was difficult for them to pay the mortgage they couldn’t afford. It is reminiscent of the US financial crisis in 2008.
While it is very clear that people need basic knowledge to make the right decisions, whether they are facing a financial crisis or not, there is always opposition to financial literacy.
In a curious and interesting way, the anti-financial literacy debate is similar in different countries and over time. They tend to eat quite a lot of fear. It’s time to shake off your fears.
The first statement is that not all of us can be professionals, not everyone has to be financially understandable and expensive. The analogy that supports this argument is that you don’t need to know what’s going on under the hood to drive a car, and you don’t have to be a scientist or medical professional to manage your health. Along the line. You can rely on a mechanic if your car breaks down or a doctor if you are sick.
This argument is based on two false assumptions. First, financial literacy is aimed at turning people into professionals. It’s not like this. And that is not the goal of most education. We don’t teach literature so students can write a War and Peace sequel, but rather to teach them the value of a good book. Financial education aims to teach basic concepts. Just as you need to read and write to participate effectively in social life, you also need knowledge of basic financial concepts.
Another misconception is that people seek advice from an expert when they need help. According to one study, anyone who consults a financial advisor already has some financial knowledge. Financial education and financial advice are complementary, there is no alternative. Without basic financial knowledge, people don’t know where to look for financial advice or how to choose the best advisor for themselves.
The mainstream economy, as well as car owners who know very little about cars, discontinue critical care, and those who don’t care about their health only see a doctor when a mute illness turns into a serious one. If you don’t know the way out, it will be difficult to take care of your finances. In our complex business world, this inability has disastrous consequences.
The second claim is based on fears that governments and regulators may stop protecting consumers with financial literacy. This allows knowledgeable citizens to and should defend themselves, and regulators warn people not to read the fine print when investing and entering into financial contracts. It seems like. There is little empirical support for this statement. Countries that promote financial literacy are also tightening regulations and implementing reforms to protect their citizens. Promoting financial literacy places citizens’ well-being at the center of politics. As the OECD and its international network of financial education have repeatedly emphasized, financial education and regulation are closely linked. This is or is not advice. Its goal is to help people make economic decisions that will benefit them and at the same time serve society as a whole.
The experience of the last 15 years shows that prevention is better than cure in a crisis. Financial education is an important element in prevention.
The third argument against financial literacy is more academic. Some researchers and practitioners argue that financial education is not effective in changing people’s behavior and the money spent on it is wasted. There is ancient research showing that financial literacy causes little or no change in financial behavior. However, much of this research has focused on narrow interventions and programs for which information is limited.
In fact, small or short-term interventions do not end financial literacy. One hour of financial preparation doesn’t make much difference to the school long term, if the teachers are not well trained or the curriculum isn’t strict. To get the needle into financial literacy, you need to give it the right direction.
Research on financial literacy has not just begun and has become a unique field for studying the Zeitschrift für Wirtschaftsliteratur (G53). We now know who is less financially literate and how to make financial literacy more effective. A recent meta-analysis in 33 countries looked at randomized trials that provided the most rigorous assessment of the effectiveness of financial literacy. This shows that the impact of financial literacy is very large. It also shows that financial literacy is generally cheap.
In 2018, Portugal introduced financial education in schools as part of its new citizenship curriculum. I was able to interview the Portuguese Minister of Education, a leader who is not afraid to support financial education. He said Portugal’s decision was facilitated by three reasons.
1. In light of the 2007-2008 financial crisis, national leadership wants to ensure that citizens have the skills and knowledge to deal with difficult times.
2. In a changing world, young people need to talk about finances more than ever to be successful in life.
3. Financial education is part of citizenship. People with financial literacy can benefit society as a whole.
I think we can all follow Portugal’s example. You don’t have to wait until the third crisis takes effect. The time without fear has come.