Financial literacy is a term used to describe financial, credit and debt management and the knowledge necessary to make financial decisions responsibly. This includes anything from how to avoid debt to how a checking account works. The daily decisions made by an average family when trying to buy a home, balance a budget, save for retirement or fund their children’s education are reliant upon financial literacy.
Lack of financial literacy is a global problem, occurring both in developing economies and in developed or advanced economies. Here are a few trends that show the importance of making thoughtful decisions about finances:
- There are complex options
Recently, consumers are being asked to choose between a number of investments and savings products. The products are more complex than in past. Consumers are asked to choose amongst product options that offer various interest rates and maturities. Many people aren’t adequately educated to make these decisions. Choosing complex financial instruments that have a wide range of options can impact a consumer’s ability to finance an education, buy a home, or save for retirement.
2) Consumers are responsible for more of the financial decisions
In past generations, people could depend on pension funds to provide more of their retirement funding. Pension funds are managed by professionals, so the financial burden was placed on companies or governments that sponsored them. Consumers were not a part of that decision-making process and usually did not even contribute their own funds. It was rare for consumers to be made aware of the funding status or investments held by the pension. Now, the responsibility for retirement planning has shifted to the consumers. Pensions are now a rarity, especially among new workers. Employees are instead being offered the ability to participate in 401K savings plans. In these plans, they need to make investment decisions and contribute to the plans.
3) The marketplace is changing
The financial landscape is constantly changing. Because the marketplace is now global, there are many more participants in the market than there used to be, and many more factors that can affect it. Technological advances such as electronic trading have caused the financial markets to be even more volatile. These factors lead to conflicting views. As a result, it can be difficult to set up, implement and follow a financial roadmap.
4) Lack of government aid
One of the biggest courses of retirement income in the past was Social Security. However, the amount paid by Social Security currently is not enough, and Social Security may become completely unavailable in the future. According to the Social Security Board of Trustees, the Social Security Trust fund may be depleted by 2033. At this point, Social Security serves more as a potential safety net that may or may not provides the amount necessary for basic survival.
5) Longer life spans
The last reason is a bit more simple: we’re living longer. As time progresses, the average lifespan is increasing. As a result, we need more retirement savings than prior generations do.
Financial literacy has always been instrumental in helping consumers make smart financial decisions, but now, it’s more important than ever. Make sure you stay informed so that you know what to do when posed with a series of financial options that can drastically affect your life.
Ajay Nagpal, the Chief Operating Officer at investment management firm Millennium. Ajay Nagpal supports social entrepreneurship through his work as a Board member of Echoing Green. Please visit his social entrepreneurship blog to learn more about that! Also, find him on Behance!