How financially literate are you?

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 managing your personal finances, and budgeting and investing.

It covers a variety of important financial skills and concepts.

Having a strong foundation of financial literacy can help support various life goals, such as saving for education or retirement and using debt responsibly to grow your assets.

The pitfalls of being illiterate

Being financially illiterate, on the other hand, can lead to a number of financial disasters.

One of the more common ones is the tendency to accumulate unsustainable amounts of debt, either through poor spending decisions or a lack of long-term preparation.

This, in turn, can lead to a poor credit rating, over-indebtedness, or even losing one’s home. 

And people who are financially literate are generally less vulnerable to financial fraud.

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.

The all-important skills

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, the Franc Group has created a simple, free online quiz that assesses your understanding of important foundational concepts.

Don’t gamble on it

With these concepts in place, you are less likely to engage in activities that could weaken your financial situation.

Like gambling. The most recent Old Mutual Savings & Investment Monitor (OMSIM), which tracks the financial wellness and behaviour of the country, highlights that 49% of the survey respondents gamble online, up 5% from last year.

While gambling may be fun for the few who can afford to lose money, for most people losing is painful and they are in fact hoping to improve their lot by hitting the jackpot. If they were a little more literate, they would appreciate the odds against them and realise they are likely to lose more than they win.

We’re not getting more literate

Data on financial literacy in South Africa is surprisingly scarce. The most recent data available is from a 2020 study commissioned by the Financial Sector Conduct Authority and the 2015 Global S&P Financial Literacy Survey.

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 FSCA study revealed a declining trend in the percentage of questions answered correctly (scores improved in only one of five categories). South Africa’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 FSCA 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.

Buck the trend

You can improve your financial literacy by reading books, listening to podcasts subscribing to financial content from trusted sources. You can also talk to a professional financial adviser. 

Being financially literate means, you have the foundation in place. 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 – educating yourself is the key to success when it comes to managing money.