The power of financial literacy

  Most of us believe that having more money will solve our financial stress. In most cases, this is not true. Your financial wellbeing depends more on what you do with your money, than on how much you earn. This, in a nutshell, is financial literacy. Here is a true story to illustrate the power of financial literacy. Hilda is a beauty therapist who works on contract basis for three different salons, four days a week, and also has a few private clients. She helps support her brother, sister-in-law and nephew. She is debt free and believes that she is frugal with her money. Yet, Hilda never seems to have money. To make ends meet, she either needs another job, or her current clients must pay her more. One day, a friend she trusts, offers Hilda help with managing her money. Hilda jumps at the opportunity and the two of them sit down for their first discussion on financial planning. “Let’s start with your budget,” the friend says. ‘I don’t have a budget,” Hilda replies. “How much do you earn every month?” the friend asks. “I don’t know,” Hilda replies. So they start by writing down all Hilda’s clients and how much each of them pays her. They add the amounts together, and Hilda is amazed to see the total. She did not think that she earned that much. “How much do you spend every month?” the friend asks. “I don’t know,” Hilda says. She does know however, how much her transport costs per day, how much she gives to her brother and to her church, and how much she spends on airtime, a funeral policy and her nephew’s school fees. Hilda and her brother’s family live in an RDP house, hence they have no rent or mortgage payments. So the friend writes it all down, and the two of them agree on amounts for food, weekend transport, going out, and so on, to include in the budget. They add it all up and again Hilda is amazed to see that she spends less every month than what she earns. “Where does the other money go?” the friend asks. “I don’t know,” Hilda replies. Over the next few months, Hilda starts keeping record of all the money she spends – right down to the R2 she pays for a vetkoek from the lady on the street corner. Through her record keeping, the leaks in her money bucket become visible. Her brother who asks for R50 here and there. A new dress she buys. A cold drink on her way home from work. After only three months, Hilda understands her financial picture better than ever before. She is aware of how money flows into her life, and how it flows out. She has stopped certain expenses and become far more aware of what she wants to spend her money on. Most importantly, she has started a savings account. A year later, Hilda has done home renovations and she has enough savings to cover two months’ expenses. Her next goal is to start saving for retirement.  

What is financial literacy?

Financial literacy can be defined as being educated about money and finances, particularly your own personal finances. More important than the definition, however, are the results of financial literacy: people who are financially literate make better money decisions and manage money better that those who are not. Topics that come into play with financial literacy include budgeting, expense tracking, debt, taxes, retirement savings and estate planning.  

Why does financial literacy matter?

The short answer is that bad money decisions are expensive. For example, a study done in America in 2019 by the Financial Industry Regulatory Authority(FINRA), found that a lack of financial literacy cost Americans a total of USD295 billion in 2018. Some of the households that participated in the study, reported annual losses of up to USD2 500 due to poor financial decisions. It further said that 63% of Americans could be categorised as financially illiterate.  

How financially literate are we?

A 2019 study by Maria Botha, a masters student at the University of Johannesburg, found that 40.5% of South Africans can be regarded as financially literate. This was determined by the number of people who correctly answered at least three out of five financial literacy questions. The Standard & Poor’s Ratings Services Global Financial Literacy Survey 2015 study in 140 countries , South Africa had a 42% literacy rate, compared to 35% in Brazil, 38% in Russia, 24% in India, and 28% in China. However, in a study of 30 countries, South Africa was placed last. In South Africa, as in most other developing countries, older people are less financially literate than younger people. Interestingly, South Africa is one of very few countries where there is no gender gap in financial literacy – men and women appear to be equally educated (or not) when it comes to money. Reasons for our lack of financial literacy include fairly poor overall education and poverty – people who see themselves as poor, do not see the value in learning about money and making better money decisions.  

How do we change the situation?

Government and financial institutions have realised that financial literacy needs to improve for our country’s economy to improve. As a result, there is a lot of free financial education material available. In 2018, government piloted Money Smart Week South Africa in Gauteng. This year’s country-wide campaign was unfortunately scuppered by the Covid-19 pandemic. Many financial institutions, reputable unsecured lenders included, regularly run consumer education campaigns, and have a wealth of financial literacy material on their websites. However, the material only has value when we as consumers use it to educate ourselves and then change our money behaviours.  

Signs that you might need help in getting financially literate

None of us like to admit that we are not up to speed on financial literacy. But the only way to get a better handle on our household finances, is by identifying what we don’t know and then putting in the effort to get educated. Here are a few questions to help you identify your financial literacy gaps:

1. Do you have a monthly budget that includes all of your basic expenses, any debts, and savings? You could create a simple personal budget by using Bayport’s free online tool here.
2. Are you tracking your expenses and do you know about how much money you spend to cover living expenses over a period of three to six months?
3. Are you in debt? Are you taking active steps to reduce your debts?
4. Do you have an emergency fund in place that would allow you to get through an event like losing your job or crashing your car without having to borrow money?
5. Do you understand how compound interest grows invested money?
6. Do you understand the importance of insurance, and do you have insurance in place to protect you financially in the event of a major life emergency?

If you answer “no” to two or more questions, you have some learning to do.  

How to improve your own financial literacy

The good news is that it has never been easier to improve your financial literacy. There are countless resources available online, in bookstores and libraries, and in the form of knowledgeable people. All you need is the desire to learn and the will to make the small changes that will bring big benefits.

• Read Whether you Google personal finance articles or open an investment book, reading up on financial issues is one of the easiest and fastest ways to improve your financial literacy. Visit our blog here to learn more about financial wellness.
• Take a class Online financial literacy classes or courses are easy to find (just make sure you don’t sign up for a get-rich-quick scam!), covering topics like accounting, retirement planning, or saving for university. Also take a look at what is available through local colleges, or maybe your employer offers a financial wellbeing programme.
• Listen to podcasts and radio shows Many radio stations (if not all) have financial programmes. Make a point of listening to just one or two – you might be surprised at how interesting it is! Many shows don’t only talk about the national or global economy, but also focus on personal financial advice that can be extremely useful.
• Watch television or YouTube videos Video is a great way to absorb some personal finance lessons, especially on investing and participating in the stock market. As with radio, many television stations offer finance programmes, and YouTube is a wealth of information. But, as we’ve said before, just make sure that you don’t fall prey to scams – you are looking for education, not schemes to get rich quickly.
• Talk to a financial professional Many of us believe that you only talk to a financial planner when you have a lot of money. This is not true! The sooner you get good advice and solid information, the sooner you can improve your finances. A sure-fire way to learn about finance is to talk to, and work with, a financial planner, a tax planner or an estate planning specialist on a personal, one-on-one basis. Getting the facts from a financial expert in person is a great learning experience. Plus, you get the valuable opportunity to ask the personal financial questions that are important to you.

Improving your financial literacy can be fun, and is an extremely empowering experience. Once you feel more in charge of your finances, you will feel more in control of your life. Try it – you will love it!

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