Financial education is increasingly important, and not just for investors.

It is becoming
essential for the average family trying to decide how to balance its budget, buy a home, fund
the childrens education and ensure an income when the parents retire.
Of course people have always been responsible for managing their own finances on a day to
day basis to spending on a holiday or save for new furniture; how much to put aside for a
childs education or to set them up in life .Besides , the recent developments have made
financial education and awareness increasingly important for financial well-being.
For one thing, the growing sophistication of financial markets means consumers are not just
choosing between interest rates on two different bank loans or savings plans, but are rather
being offered a variety of complex financial instruments for borrowing and saving, with a
large range of options. At the same time, the responsibility and risk for financial decisions
that will have a major impact on an individuals future life, notably pensions, are being
shifted increasingly to workers and away from government and employers. As life
expectancy is increasing, the pension question is particularly important as individuals will be
enjoying longer periods of retirement.
Individuals will not be able to choose the right savings or investments for themselves, and
may be at risk of fraud, if they are not financially literate. But if individuals do become
financially educated, they will be more likely to save and to challenge financial service
providers to develop products that truly respond to their needs, and that should have positive
effects on both investment levels and economic growth.

Banks and other institutions are overwhelming consumers with credit opportunities such as
the ability to apply for credit cards or use credit checks to pay other credit balances thus
without the proper knowledge or checks and balances, it is easy to get into financial trouble.
In past generations, cash was used for virtually every purchase. Today, cash is rarely used.
The way we shop has changed as well. Online shopping has become the top choice for many
younger shoppers, creating ample opportunities to use and overextend credit, an all too easy
way to accumulate debt, fast. Many of these consumers have very little understanding of
finances, how credit works and the potential impact on their financial well-being for many,
many years. In fact, the lack of financial understanding has been signalled as one of the main
reasons behind savings and investing problems faced by many people.
Financial literacy is the confluence of financial, credit and debt management and the
knowledge that is necessary to make financially responsible decisions which are integral to
our everyday lives. Financial literacy includes understanding how a checking account works,
what using a credit card really means, and how to avoid debt. In sum, financial literacy
impacts the daily decisions an average family makes when trying to balance a budget, buy a
home, fund their childrens education and ensure an income at retirement.
A lack of financial literacy is not a problem only in emerging or developing economies.
Consumers in developed or advanced economies also fail to demonstrate a strong grasp of
financial principles in order to understand and negotiate the financial landscape, manage
financial risks effectively and avoid financial pitfalls. Nations globally, from Korea to
Australia, or from Germany to the U.S., are faced with populations who do not understand
financial basics.

The level of financial literacy varies according to education and income levels, but evidence
shows that highly educated consumers with high incomes can be just as ignorant about
financial issues as less educated, lower income consumers. Although in general, lower
income individuals tend to be less financially literate. And it seems consumers are hesitant to
learn.

Consumers are shouldering more of the financial decisions: Retirement planning is one
example of this shift. Past generations depended on pension funds to provide the bulk of their
retirement funding. Pension funds are managed by professionals and put the financial burden
on the companies or governments that sponsored them. Consumers were not involved with
the decision making, typically did not even contribute their own funds, and they were rarely
made aware of the funding status or investments held by the pension. Today, pensions are
more a rarity than the norm, especially for new workers. Instead, employees are being offered
the ability to participate in 401K savings plans, in which they need to make investment
decisions and contribute to the plans.
Complex options: Consumers are also being asked to choose among various investment and
savings products. These products are more sophisticated than in the past, asking consumers to
choose among different products options offering varying interest rates and maturities,
decisions they are not adequately educated to make. Deciding on complex financial
instruments with a large range of options can impact the consumers ability to buy a home,
finance an education or save for retirement, further complicating financial decision making.
Lack of government aid: The major source of retirement income in past generations was
Social Security. But the amount paid by Social Security is not enough, and it may not be
available at all in the future. The Social Security Board of Trustees reported that by 2033 the

Social Security trust fund may be depleted, a scary prospect for many. So now, Social
Security acts more like a potential safety net that may provide enough for basic survival. (For
more, see: A Social Security Reality Check.)
Longer life spans: We are living longer. This means we need more retirement savings than
prior generations.
Changing environment: The financial landscape is very dynamic. Now a global marketplace,
there are many more participants in the market and many more factors that can influence it.
The quickly changing environment created by technological advances such as electronic
trading make the financial markets even swifter and more volatile. Taken together these
factors can cause conflicting views and difficultly in creating, implementing and following a
financial roadmap.
Too many choices: Banks, credit unions, brokerage firms, insurance firms, credit card
companies, mortgage companies, financial planners, and other financial service companies
are all vying for assets creating confusion for the consumer.
Why It Matters
Financial literacy is crucial to help ensure consumers save enough to provide adequate
income in retirement while avoiding high levels of debt that might result in bankruptcy and
foreclosures. A study from financial services company TIAA-CREF showed that those with
high financial literacy plan for retirement and in essence have double the wealth of people
who do not plan for retirement. Conversely, those with low financial literacy borrow more,
have less wealth and end up paying unnecessary fees for financial products. In other words,
those with lower financial literacy tend to buy on credit, and are unable to pay their full
balance each month and end up spending more on interest fees. This group also does not
invest, has trouble with debt and a poor understanding of the terms of their mortgages or

loans. Even more worrisome, many consumers believe that they are far more financially
literate than they really are.

And while this may seem like an individual problem, it is broader in nature and more
influential on the entire population than previously believed. All one needs to do is look at the
financial crisis of 2008 to see the financial impact on the entire economy from a lack of
understanding of mortgage products and the subsequent defaults. Financial literacy is an issue
with broad implications for economic health and an improvement can lead the way to a
global economy that is competitive and strong. (For more, see: The 2007-08 Financial Crisis
in Review.)

The Bottom Line

Any improvement in financial literacy will have a profound impact on consumers and their
ability to provide for their future while avoiding the pitfalls of debt. Recent trends are making
it all the more imperative that consumers understand basic finances because they are being
asked to shoulder more of the burden of investment decisions in their retirement accounts
while having to decipher more complex financial products and options. The tasks are not easy
but a better understanding and more knowledge can ease the burden tremendously.