NATHANIEL LEE | Financial literacy can make difference between poverty and good life

Finance must be taught at schools so pupils can learn that money can be controlled, and not the other way round

A strong foundation about the ways of money and how it works. Will ensure the next generation does not repeat the financial mistakes of their parents and live debt-free lives, free from regret.
A strong foundation about the ways of money and how it works. Will ensure the next generation does not repeat the financial mistakes of their parents and live debt-free lives, free from regret.
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On every occasion I have lent out one of my personal finance books such as Rich Dad Poor Dad by Robert Kiyosaki and The Richest Man in Babylon by George Clason, the standard reaction from the borrower has always been a wish to have been exposed to the books earlier.

“I wish I had been exposed to such books when I was younger, my life would have turned out differently, financially speaking,” my borrowers exclaim.

Such a response betrays the sad reality that out of all things schools teach us, one lesson we are not taught is how to handle money. It is said money makes the world go round and this glaring omission can lead to financial illiteracy and stagnation.

Financial literacy refers to the ability to understand money and finance. The lack of such literacy leads to a situation of living from hand to mouth, unable to save for retirement, buy homes or pay bills. Financial literacy entails among others budgeting, paying bills in time, banking and avoiding overdrafts, being able to spot a scam and protecting one’s personal information. It also entails familiarising oneself with concepts such as earning, consuming, saving, investing, borrowing and finding financial information.

Money affects life on a daily basis and our financial intelligence affects every single dimension about money, including how we earn it, spend and save it wisely. Financial illiteracy can land unwise borrowers in debt traps where they cannot extricate themselves. An example is that of using unscrupulous loan sharks who charge exorbitant interest. Illiteracy will also lead to a lack of emergency or retirement savings.

On the other hand, good financial habits include drawing up a budget and sticking to it, diligent saving and trying to stay away from bad debt. This refers to money borrowed for unessential items such as expensive clothes, eating out or going on holiday. Good debt in contrast refers to money borrowed for things that are absolutely necessary for life such as buying a house and paying for an education.

To ensure financial security, it is crucial to teach pupils about the importance of saving which is building wealth through spending less in order to realise important goals later. This is referred to as delayed gratification. Saving will also ensure that one can have disposable funds in the case of an emergency such as being without an income for a short period.

Budgeting is a skill of planning and managing money. Understanding where every cent goes will enable one to create a plan to spend less on unnecessary items and save more for those that we need. The rule should be that income should always be greater than expenses with the difference being what is put away as savings. The skill of budgeting is necessary for financial security and independence. Another important financial concept is that of investing which is creating and growing wealth by putting money aside to generate interest or profit.

There is a need for schools to demystify financial jargon such as compound interest, inflation, diversification, assets, liabilities and loan terms. Such literacy is essential if the goal is to build wealth and enjoy financial security. Pupils have to learn that money can be controlled, not the other way round. They need to know how money works and that if they stick to the basics, they can make money work for them instead of working for money for the rest of their lives.

They need to be exposed to rags to riches stories of those people who started out with nothing but ended up with incredible wealth and those who blew their wealth. Education is the key to success when it comes to money. Financial illiteracy can lead to accumulation of debt, poor spending decisions, lack of long-term preparation, poor credit records, bankruptcy and housing foreclosure.

The benefits of financial literacy include empowering individuals to make smarter financial decisions, prevent devastating mistakes, prepare for emergencies, reach financial goals and boost confidence.

The key to financial security and independence rests on the four pillars which are pay yourself first, pay bills promptly, manage debt and invest in the future. While it is important for schools to teach parts of speech and fractions, it is equally if not more important to teach them about the ways of money and how it works. A strong foundation will ensure the next generation does not repeat the financial mistakes of their parents and live debt-free lives and also free from regret.

If schools play their part, financial books and other resources can only expand on this foundation and ensure a financially secure generation.

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