Key blog takeaways
📚 Financial literacy refers to a variety of important financial skills and concepts.
📚 People who are financially literate are generally less vulnerable to financial fraud.
📚 A strong foundation of financial literacy can help support various life goals, such as saving for education or retirement, using debt responsibly, and managing a budget.
📚 Financial literacy can be obtained through reading books, listening to podcasts, subscribing to financial content, or talking to a financial professional.
What is financial literacy?
Benjamin Franklin, one of the founding fathers of American independence and a famous polymath, is credited with coining the oft-quoted saying, “Nothing is certain except death and taxes.” It follows that everyone ought to know a bit about staying healthy and managing money.
Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.
Financial literacy means you have the foundation stones in places. Just as language literacy does not mean you know every word in the dictionary, financial literacy is usually only the beginning of a lifelong journey of learning.
The earlier you start, the better–-education is the key to success when it comes to managing money.
Knowledge is power
Every year Old Mutual publishes the Savings & Investment Monitor (OMSIM), which tracks the financial wellness and behaviour of the country. The survey has been conducted for over 10 years and provides valuable insights into people's relationship with money .
The most recent report was published last month. One fact that jumped off the page is that 49% of the survey respondents gamble online, up 5% from last year. Unfortunately, OMSIM doesn't keep tabs on the state of financial literacy in the country, which is perhaps an oversight.
It’s undeniable that knowledge is power. Increasing financial literacy will undoubtedly improve financial behaviours.
State of the Nation
Although the latter found that 42% of South African adults were financially literate (placing us 3rd in Africa and 39th overall out of 137 countries), the SASAS study revealed a declining trend in the percentage of questions answered correctly (scores improved in only one of five categories). SA’s Financial Knowledge Domain score dropped from 60 in 2015 to 51 in 2020.
Unsurprisingly, financial literacy varies dramatically with income. Higher income levels are generally associated with better education; as income levels and access to education improve, so should literacy. In a developing country, we would expect to see gradual improvements in financial literacy across the broader population.
But the SASAS survey found that the opposite has been happening since 2015. The numbers of the financially illiterate are increasing – the proportion of the general public scoring 25 or below increased from 7% in 2015 to 21% in 2020.
Why is financial literacy important?
Being financially illiterate can lead to a number of pitfalls. One of the more common is the tendency to accumulate unsustainable debt burdens, either through poor spending decisions or a lack of long-term preparation. This, in turn, can lead to a poor credit rating, overindebtedness, or even losing one’s home.
Money plays a crucial role in our well-being. It would not be too much to say that financial literacy is an essential component of a secure and successful life.
Although many skills fall under the broad umbrella of financial literacy, the most important are arguably:
- Budgeting–knowing how to live within your means
- Debt management–understanding credit, knowing when to borrow, how to manage loans and pay them off
- Saving and investing–learning how to build capital and make it grow
These skills require basic numeracy (percentages, for example) and at least a working knowledge of key financial concepts such as interest rates, compounding, and the time value of money.
If you want to test your financial literacy, Franc has created a short, simple, free online quiz that can assess your financial literacy across basic concepts, financial maths, debt, tax and investing.