Financial Literacy- the guide to a secure future
Dr. Kashif Saleem, Associate Professor of Finance, University of Wollongong in Dubai
Financial literacy is a crucial life skill that is often overlooked. With the increasing complexity of financial markets and the importance of financial planning for long-term stability, it’s becoming increasingly important to understand basic financial models essential to make informed financial decisions to avoid financial insecurity.
According to the S&P Global Financial Literacy Survey, only 33% of adults globally are financially literate. Financial illiteracy is an issue that impacts all nations alike.
In fact, even in some of the most advanced economies, such as the US, the UK, and Japan, the average adult financial literacy rate is just 55%. On the other hand, the Scandinavian countries, with their renowned social welfare systems, are leading the way in financial literacy, with an average of 69% of adults possessing the necessary knowledge.
The continually evolving financial ecosystem has caused mature and developing nations to fret more and more in recent years about the degree of financial literacy among their citizens. The financial crisis, both the subprime crisis of 2007 and the recent Covid-19 pandemic added to the concern as it was realized that poor financial literacy was one of the contributing factors to poor financial decisions, which in turn might have extremely detrimental knock-on effects.
Financial literacy is increasingly recognized on a global scale as a crucial component of economic and financial stability and development.
Why Financial Literacy Matters Now More Than Ever:
With the soaring cost of living globally, and the changing dynamics of the job market due to technological advancements – the introduction of complex financial products (huge variety of debt & saving instruments), and countless new investment vehicles – Crypto, NFTs, hedge funds, ETFs – just to name a few, the choices made regarding these economic issues, financial products, and investments have severe implications for any individual’s financial well-being.
The influence of financial literacy on people’s decisions and financial behavior is well-documented in the economic literature. Studies show that financial literacy plays a critical role in influencing borrowing and debt management, saving, and investing behavior.
At large, financial decision-making and literacy can be distilled into three fundamental concepts that are applicable to every context and economic environment. These are the Time value of money, which involves understanding how interest rates work and the power of compound interest; the Risk-return tradeoff, which explains how investment risk and return are related; and the Quantity Theory of Money, which reveals the impact of inflation on the value of money.
Understanding financial concepts and practices is an essential life skill and a vital intellectual ability. Financial literacy can enhance one’s critical thinking, conceptualization, and decision-making skills, making it an indispensable skill for young people, including students in schools and universities, as they prepare to manage their finances in the future.
Moreover, financial literacy is not just about personal finance. It is the gateway to entering the world of investments and making informed decisions about money matters.
The Financial Literacy Gap in the UAE:
With a sizable portion of its population being young and working – 76.51% (Age group: 15-54), the UAE’s economy is one of the fastest expanding in the world, with GDP per capita $42536 – 2nd highest in GCC – Nonetheless, financial literacy is typically regarded as a challenging subject to grasp – average adult literacy rate is only 38%. This low literacy rate requires immediate policy actions, such as creating awareness for financial literacy, compulsory integration of financial education in schools’ curricula, encouraging employer-provided financial education programs, etc.
The development of financial literacy programs can be greatly aided by universities. Financial literacy programs should have clear objectives and be tailored to specific target audiences, such as youth, women, and professionals. These programs can cover a range of financial topics, such as budgeting, saving, investing, and debt management. They can also include practical training on financial tools and technologies, such as online banking, mobile payments, and digital wallets.
The journey toward financial literacy does not end with the mastery of concepts and principles; it must evolve to encompass digital, sustainable, and ethical finance, shaping a future that is equitable, prosperous, and environmentally conscious.
As technology continues to evolve and global markets become more intricate, the need for financial literacy will only grow, and it is our collective responsibility to ensure that future generations are equipped with the knowledge and skills to navigate this complex landscape.