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What is financial literacy?
According to Investopedia, Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.
In short, financial literacy is the basis of all your interactions with money in its various forms – and since financial matters are always changing and developing, this educational journey is something that is with us all of our life. The earlier in life one starts to dive into the topic, the better. Knowledge and understanding are the keys to success when it comes to money matters.
What is an example of financial literacy?
The term “literacy” means the (basic) ability to read and write. And in the same way, financial literacy means the ability to understand finances: from being able to go to a grocery store and pick up products for which you have enough cash on hand, to someone understanding how much money they have left at the end of the month after paying all their bills, through to complex matters such as making short bets on derivatives that are traded on an exchange. The basis for all these decisions and the ability to make them is financial literacy.
Why is financial knowledge so important?
We see record trading volumes on stock exchanges due to the pandemic and people working from home and having time for their private portfolio trades. Poverty among older people is rising even though they had well-paying jobs in their working lives and thought they did well with their employers’ pensions schemes. We see negative interest rates and – especially in Switzerland – a record run on, and thus price increase in, real-estate and mortgages, and a younger generation that is all about crypto currencies and NFT trades. One might assume that we live in a time when financial literacy is high. But the opposite is true.
What are “The Big Three” in financial literacy?
Economist Annamaria Lusardi, a world-expert on financial literacy and professor at George Washington University, ran several studies which all concluded that the level of financial literacy among young adults, but also people with an academic background, is still lacking.
In these studies, she asked participants three basic questions, which have come to be known as “The Big Three” in financial literacy research:
1) How much money will you have in your account after five years if you neither deposit nor withdraw money during that time?
2) Suppose the interest rate on your savings account is 1% and inflation is 2%. How much can you buy with your money in your account after one year?
3) Is it riskier to invest money in one investment or in several investments?
The rather surprising – and somewhat scary – findings of her research are that even in countries with very developed financial markets, for example the US, Germany, the Netherlands, or Switzerland, the level of financial knowledge is still low. And many participants are not able to answer these questions correctly.
About Andrea Weidemann
Since December 2016, Andrea Weidemann has headed the Swiss Finance Museum, the first and only finance museum in Switzerland, a country known for its banks. Her main focus is the creation and realization of new exhibitions, the development of content for promoting financial literacy among children, youth, and adults, as well as the establishment of new digital channels to promote the museum. Prior to directing the museum, Andrea spent almost 10 years in the financial sector, most recently as Head of Marketing and Public Relations with index provider STOXX Ltd. She studied liberal arts and political science at Goethe University in Frankfurt, and at Sacramento State University of California, and has an MBA in international communications from Quadriga University of Applied Sciences in Berlin.
Who needs financial literacy skills?
Everyone! Among many research findings, one that stands out is that financial literacy follows an inverted U-shape. It is thus lowest for younger and older demographics, and peaks at middle age. But most countries’ official school curriculums neglect the topic of financial literacy. And this is especially fascinating given the fact that there are a number of studies in the academic world which indicate that increased financial literacy, especially in young people, could prevent major crises. A World Bank study from 2014, for example, concludes that the global financial crisis of 2008 could have been largely avoided if those directly affected had been more financially literate.
As a museum director, why are you involved with financial literacy?
Well, I believe that our duty as museums is not only to conserve and exhibit cultural heritage, but that we also have an educational function or mission. And as part of this, I strongly believe that our duty with the Swiss Finance Museum is to contribute to the increase in financial literacy by also making it equally accessible to all people, and especially children.
At the Swiss Finance Museum, one of our goals is to offer programs for students. We offer regular museum tours with a focus on trading, exchanges, and the history of the Swiss financial center. But we have also introduced a workshop especially designed for young children from the age of 6.
How can I improve my financial literacy skills?
As awareness for this topic and its importance is growing globally, there is also a rise in educational programs – many of them free, and very accessible. Personally, I believe that it is important to find a neutral place for this type of education. Don’t sign up for a course where it’s clear that at the end someone will try to sell their own financial product. So, find an independent source.
And of course, it always depends on your level of expertise – what works for person A may not work for person B. There are now many educational programs geared at women specifically, as they typically have different investment behavior from men.
In addition to adults improving their financial literacy, I strongly believe that it is extremely important to include this topic in the education of children. And not just through the school curriculum, but also at home. Talk about money at home, at the dinner table. Explain finances to you children, make this topic more tangible for them.
So, parents also need to “teach” financial literacy to their children?
Most likely not “teach” in the classical meaning of the word. But as mentioned previously, it’s important that children get an understanding of finances and money – even if it’s just a basic one to start. I mentioned Lusardi’s inverted U-shape curve of financial literacy earlier, which shows that children have a very low understanding of these topics. And unfortunately, it is also a topic that is still neglected in many school curriculums on a global level.
In 2015, the German Institute for Economic Research ran a study on the extent to which school education, the parental home, and the resulting financial education have an influence on the later handling of financial investments. The results show that family background has a major influence on the level of financial literacy and affects behavior through financial education.
This fact, paired with the findings of the World Bank study mentioned earlier, should make it clear why money should be a topic at the dinner table as well.