Financial literacy is something many people around the world take for granted, but while you might assume financial literacy levels in most countries around the world are generally high, the reality is quite different.

To many people, the world of finance is a relative unknown, complete with complex terms and products that are often misunderstood. Even in developed countries where you might expect a good level of financial education, as we’ll see, financial illiteracy is still surprisingly high. 

What is financial illiteracy?  

Financial illiteracy is a basic lack of understanding about how to manage your money in an effective way for everyday life. That includes everything from managing a bank account and paying bills when they’re due to the importance of saving and reducing your debts over time.

Those who are financially illiterate also lack understanding about the financial products that are available, how and when to use them and the type of benefits they can bring.

Why is financial literacy important?

Financial literacy helps people plan for the future, make better decisions about their money and reach their goals. By understanding the basics of budgeting, debt, saving and investing, people can set their expectations and make realistic plans to get there.

Lacking these key skills and knowledge makes it increasingly difficult for an individual or family to achieve their long-term financial goals and deal with the financial problems they encounter. 

The instant loan provider Wonga has produced an excellent (free) guide to the four pillars of financial literacy available here. This makes for a good starting point for anyone who wants to take steps to improve their financial literacy and get a better grasp of the basics. 

Financial literacy levels are surprisingly low 

Financial literacy levels are within the reach of anyone with a basic level of education, yet even in developed countries, a high number of people lack the skills to manage their money effectively. 

A recent study conducted by the Alliance for Financial Inclusion concluded that less than one third of African adults possess a basic understanding of financial concepts. Of course we must acknowledge that infrastructure plays a role in this statistic, less than half of Africans have reliable access to the internet and the wealth of free educational resource that comes with it. However this does not fully justify the statistics we’re seeing, which leads us to ask..

How can we improve financial literacy?

The most obvious way to improve financial literacy is to introduce basic financial management lessons in schools. Making financial education a core part of the curriculum will give students an insight into budgets, the importance of saving and how to avoid debt. Importantly, it could also help them differentiate between good and bad debt. 

For adults, improving your financial literacy is typically a DIY job. Listening to financial podcasts, reading personal finance books and keeping a budget can all help to equip you with the fundamental skills and knowledge you’ll need.

There’s also a role for the financial industry to play. Brett Van Aswegen, the CEO of Wonga, believes responsible, regulated lenders must do more to boost the financial literacy of their customers:

“By providing financial literacy lessons at source, lenders can differentiate themselves as a responsible lending institution and lead the way through educational initiatives which will ultimately create positive financial behavioural change”.