Why now more than ever young people need to be savvy about money, from Kunwar Sanjay Tomar.

Financial literacy, as defined by the OECD, is “A combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial wellbeing.” 1

The above definition highlights the link between financial wellbeing and the ability to achieve it. The survey by the OECD1 links the general education level of a respondent with the ability to apply skills learnt for financial decisions, e.g., mathematical knowledge and its use in calculating the compound interest rate.

The importance of financial literacy has only grown each year. The use of credit cards, loans, new financial products and digital investment has made financial decisions more complex.

The opportunity for investment from your mobile phone has made using these digital financial tools effortless. The lure of products and services floats all around us, tempting us to make more purchases. Hence, financial wellbeing seems a challenging objective to achieve, especially for the youth of today who have been shown to be the ‘most vulnerable.’ 1

Financial literacy becomes even more critical if we look back at the various financial crises which have jolted the world. Events such as the pandemic have further exacerbated the need for financial literacy. Today, digital platforms have linked with the financial markets to create a more unified global financial market. Investing is more accessible across the globe with a single click. Similarly, economic and financial crises have a global impact, irrespective of their origin. Research in behavioural finance has demonstrated that EI (Emotional Intelligence) rather than IQ rules the financial markets. A good example is the failure of Isaac Newton in the financial markets. He complained that he could ‘measure the distances of stars but not financial markets.’ The market is more easily managed by astutely disciplined individuals. Even the simple virtue of patience can yield excellent results in the financial markets. Take the examples of the ‘Coffee can portfolio’ (the buy and forget approach) or ‘Invest and wait’ – the successes of these simple approaches are very well documented in financial research.

 

Get started early

Many countries have a young population, e.g., India, a country with ‘21% of people aged between six to nineteen-years-old.’2 The OECD measures financial literacy by comparing the knowledge of simple math and its application to financial decisions. It also collects data from schools to see how many students have bank accounts. This data shows a vast difference in financial literacy between developed and developing economies. 2

Nevertheless, both types of economies require their school-going students to make sound financial decisions. The question is, is the mathematical background provided sufficient for acquiring financial knowledge? The availability of smart mobiles with ever-increasing apps does show that number-crunching can be left to these devices. Financial literacy will make more sense to young people if they learn how to interpret output. They already know and learn various qualities at school, such as diligence, and perseverance, which are golden rules applicable to navigating financial markets successfully.

In conclusion, today’s available apps are simple enough to feed basic details and get the output for decisions, but the gap between the needs of today’s youth and the ability to make good financial decisions will keep widening if courses are not tailor-made to suit students. A good financial literacy curriculum for young people must be motivating and more application oriented.

 

References

  1. Atkinson, A., & Messy, F.-A. (2012). Measuring Financial Literacy. https://www.oecd-ilibrary.org/finance-and-investment/measuring-financialliteracy_5k9csfs90fr4-en;jsessionid=18xTMXIYOqE_aq-GUquIk-u3.ip-10-240-5-167
  2. Karakurum-Ozdemir, K., Kokkizil, M., & Uysal, G. (2018). Financial Literacy in Developing Countries. Social Indicators Research, 143(1), 325-353. https://doi.org/10.1007/s11205-018-1952-x

Author

  • Kunwar Sanjay Tomar

    Sanjay is a faculty of finance head at the FOSTIIMA New Delhi. He is also an entrepreneur and vivid equity investor. His research interests are in behavioral finance, value investing, mergers and acquisition, financial markets and macroeconomics.
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