We are well educated, have numerous skills, expertise and knowledge in a variety of areas, but still quite a few are struggling with financial knowledge. Yet, in order to become financially independent, the most important thing is to master our finances and understand the relationships between having money and growing money. Financial literary as it is also known as, is, just as any other expertise, experience, interest, and access to the resources that make us more financially savvy. Unfortunately, the reality is still rather sobering. In a Harvard Business Review article from 2009 on the financial literary of US managers, a mind-blowing 70% of respondents were unable to answer some basic financial questions such as distinguishing profit from cash. It would already be a matter of concern for the individual if this only applied to their personal lives, but for someone in charge of hundreds or thousands of employees, this is catastrophic. It puts all those relying on those superior at risk.
Three Questions on Financial Literacy
We might think that things have changed since 2009. After all, the whole world has been exposed to a great array of financial terms since the Great Recession. Many terms such as subprime and derivatives were entirely unknown to most. But what about our knowledge regarding our own finances; has that also become more profound? In a recent study amongst 1,200 US Americans many were still unsure as to how interest rates and shares actually worked. You can check for yourself how good your financial literacy is. Below are the three questions the study asked:
1) Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
- More than $102
- Exactly $102
- Less than $102
- Do not know
- Refuse to answer
2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
- More than today
- Exactly the same
- Less than today
- Do not know
- Refuse to answer
3) Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
- True
- False
- Do not know
- Refuse to answer
Did you get them all? Here are the answers: 1) A.; 2) C.; 3) B.
According to their findings, only 65% of respondents got the first question right: with compounding interest, your money keeps piling up without you having to do anything; thus More than $ 102.
64% of their sample knew that their money would be worth less if they earned 1% less than inflation.
Just about 52% of the people they asked knew that mutual funds are generally safer than individual stocks.
If you were to ask your family, friends, and colleagues, do you think you would see a similar pattern?
Financial Literacy in 2014
But maybe that is only the picture in the US. What about Europe, Asia, other countries in North and South America, Australia, and Africa? Are they more equipped?
Well, it does not appear to be the case. The OECD* asked 29,000 students in 18 countries in 2014. The countries with the highest financial literacy: Shanghai-China, the Flemish Community of Belgium, Estonia, Australia, New Zealand, the Czech Republic and Poland.
According to a number of recent UK studies*, 33% of those aged 18 to 24 find themselves confused by financial terms. Only 62% of Brits across ages stated that they were saving for the future.
Other countries aren’t scoring any higher. In Germany only 49% of people think they have a good grasp of financials. And despite 70% saying that finances are important, only 56% take care of personal money matters. Even more intriguing, only 20% of respondents actively managed their finances more than once a month; 80% took care of their finances once per month or less.
Becoming Financially Literate
So why is it that so many are struggling with financial concepts? It may be due to the lack of education in school; that is very likely to be the case, but it may also be due to the complexity of terms and concepts. And this is what we at Captain Finance want to change: Making finance less scary, more fun, and increasing your wealth. After all this is the reason for why we need to know about finance, to understand how we can use it to our advantage.
Here at Captain Finance we want to share the best methods to manage your finances without having to worry about them. Whether you are interested in finances or not, there are numerous ways of making sure that your stash of money is growing; from complex to very simple strategies.
The best part: The more you think about your finances, the more fun they become, the less frightening and easier it becomes to manage them successfully. Finances are actually fun. So jump in and enjoy the journey. If you have any topics or questions that you are unable to find on Captain Finance, feel free to comment below.
- http://media.postoffice.co.uk/News-Releases/Over-1-7-Million-Young-People-Admit-They-re-Financially-Illiterate-da.aspx
- http://www.bbc.com/news/uk-23548745
- http://www.oecd.org/education/first-oecd-pisa-financial-literacy-test-finds-many-young-people-confused-by-money-matters.htm
- http://bankenverband.de/presse/meinungsumfragen/finanzwissen-und-finanzplanungskompetenz-der-deutschen
