the finance essay

the finance essay

The Impact of Financial Literacy on Personal Finance Management

1. Introduction to Financial Literacy

People without financial literacy typically exhibit poor financial decision making, which causes economic stress and strains the resources of the family unit, requires employer intervention, and sometimes prompts legislation such as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Financial literacy is essential to an open economy. Americans, who are already purchasing more goods and services overseas than ever before, increasingly depend on foreign country investment financing, and supporting policies to understand the benefits of globalization. Young Americans who wish to have rewarding employment and to contribute to the global economy must understand personal finance, such as the power of investments, inflation, and compound interest. Lastly, financial literacy is important for the economic cycle so that society does not become too sentimental about economic downturns and forget that overspending and excessive credit have consequences.

One critical concern of educators is the increasing financial illiteracy of today’s society, especially with respect to consumer matters, money management, and investment decisions. The Fourth International Mathematics and Science Study (TIMSS) showed that mathematics students in the United States performed relatively poorly in comparison to students from other countries, and financial literacy remains a concern among business school deans. It is important for colleges and universities to produce graduates who are financially literate and capable of making informed decisions. A survey of personal financial courses taught at colleges and universities found that teacher training has not kept up with increases in the number of faculty who are offering these courses. This paper investigates the impact of financial literacy on risk tolerance, savings, and home ownership. The results provide further clarification of the role of financial literacy in individual decision making.

2. The Importance of Financial Literacy in Personal Finance

Without a doubt, advancement in technology has increased the importance of education and learning in an inevitable and intense manner in recent years. Economic life gained an information-intensive feature due to globalization and increasing competition in the rapidly changing and developing world. This caused financial services to gain increasing importance. In developed countries, stock exchange investments are kept in the same category as saving. In order to invest without risk in stock exchanges, to make the profits from investment made here permanent, and to minimize losses, a substantial financial education is required. Although developing countries such as Turkey will benefit from the comfort and flexibility provided by financial services as soon as possible, they will face some problems as intermediaries slowly develop.

Financial literacy is considered an essential part of economic life. The acquisition of financial knowledge and concepts is extremely important for leaders and people in all different sectors to reach goals such as welfare, high standard of living, and even basic happiness. Prerequisite choices on what to buy and what to save or invest are part of financial decision making. This concept covers the decisions people make on their money management. Behind this concept lies quite important skills, including having complete control over finances. Control is only possible through a sound financial knowledge environment for the individual and all the other people in the social network. The level of importance of financial knowledge will play a role in every individual’s effort to increase the availability of formation in this area.

3. Barriers to Financial Literacy and How to Overcome Them

There are several barriers to higher financial literacy. Assuming that what we are interested in increasing is basic financial literacy, and not advanced skills in finance, some of those literacy barriers are intrinsic in the nature of the subject: math anxiety or a lack of interest in topics fairly far removed from a person’s daily concerns, among others. But we are generally more worried about effective demand barriers preventing people, especially young people, from accessing even the basics. These include concerns about fairly mundane math skills, the lack of specific incentives leading to the postponement or neglect of financial education, attention span, issues concerning the individual level of financial sophistication, a lack of information about the consequences of low financial literacy combined with high discount rates of return to financial education, overly-specific levels of financial literacy, and low teacher quality.

Nature of financial literacy and barriers associated with promoting it are somewhat perplexing. Poor financial choices are often obvious, and general literacy levels have been rising over time. Moreover, much of what is needed for basic personal financial management seems to be rules of thumb or common sense rather than advanced economic theories. Still, financial literacy often seems low. Given its importance, it is worth investigating why people make mistakes in this area and what we can, if anything, do to ameliorate the problem. Such an investigation would have broader implications than personal financial decisions alone, given that such poor decisions can spill over to affect entire families and society in a systemic way.

4. Strategies for Improving Financial Literacy

Third, media or social networks might contribute to the promotion or improvement of financial literacy. The pervasive media or increasing social communication platforms all provide opportunities to disseminate financial information to the general public. Evidence has shown that the financial media or various self-help communities increase financial knowledge and promote good financial decision-making. In particular, it seems that less-educated households may be more likely to regard learning financial information from media as a preferred way. The development of information technologies enhances the possibility of providing high-quality advice and low-cost financial resources to the wider society through mass media, online courses, and financial apps.

Second, the private sector may play a role in promoting financial literacy. In many advanced countries, consumers, including those with lower levels of financial literacy, are encouraged to engage in the decision-making process and to evaluate the financial products and services offered by different private institutions. These institutions have also supported clients to make good use of their products and services by hosting an abundance of financial education programs. The programs offered by private institutions may provide financial knowledge and information on a wider range of financial products and are designed to achieve better outcomes when integrated into the sales process.

There are several strategies that have been proposed or implemented for the improvement in financial literacy in different countries. First, curriculum reform may improve financial literacy. Including personal finance education courses in the formal curriculum or making personal finance education a key part of existing courses may be effective ways to improve financial literacy, especially for students who are still in school. Several states in the United States require that personal finance courses or personal finance standards be taught in high schools, and research has reported positive effects of this regulation on financial outcomes later in life. Governments have also launched financial education programs or added financial topics to existing programs targeted at and available for young students in recent years, which often have positive effects on financial knowledge.

5. Case Studies and Examples of Successful Financial Literacy Programs

Education is not the only arena for financial literacy programs. One of the objectives of micro-finance institutions (MFIs) is to include the excluded. Successful programs provide access to financial literacy tools alongside access to financial intermediation. MFIs generate business and social networks, foster informal money clubs, and carry the memory of historic financial linkages, all ways that financial literacy gains can be made sustainable.

Financial literacy programs have demonstrated a broad capacity for generality. In developed countries, consumer groups, private financial institutions, professional societies, and others have organized a rich variety of programs. For developing countries, it might be thought that the task would be more difficult due to a less sophisticated or more dispersed population. However, many successful micro-entrepreneurs test the stereotype of poor financial skills and high aversion to formality, and such small groups offer ready paths for the dissemination of financial literacy tools.

In some developing countries where financial census and surveys have been undertaken, the results are rather surprising. A substantial majority of respondents have not used formal methods of financial intermediation and have made use of informal sources, such as ROSCAs (rotating savings and credit associations) and ASCAs (accumulating savings and credit associations), various other moneylenders, and “afees often naman” or the “five, six” lenders of the Philippines.

Models of successful programs, both domestically and internationally, are described in this section. Each, in some way, offers key lessons for the extension of financial literacy throughout our society. They highlight the roles that schools, employers, public-private partnerships, professional societies, philanthropy, and the press can play in advancing financial literacy. Many of these programs focus on sustainability and self-reinforcing mechanisms for support.