FINANCE FACTS: Financial Literacy

If you ‘own a bank account’ and ‘save for a rainy day’, odds are, you feel financially equipped to manage your finances, but bank interest rates have stagnated below 2% and inflation continues to erode the value of savings. This metric of financial education is woefully inadequate, and according to a global survey (Standard & Poor Global FinLit Survey 2015) 3 in 5 persons with bank accounts are not financially literate.

The current economic system requires this generation to be able to navigate bank loans and mortgages, but our financial teachers — our parents — were raised by a generation that mainly rented homes or constructed simple structures with savings and community self-help. Car ownership was uncommon, furniture was sourced using cash or on lay - away (smaller prepayments); and expensive university fees were not on the cards. Now, access to credit cards, online shopping, and stock options place more financial products at our disposal, and require even more complex decisions.

To avoid the perpetuation of generational consumerism, conversations on wealth creation must be had, beginning with the basic question: What does financial literacy mean? In simple terms, financial literacy is the ability to understand how three concepts work: (1) interest rates, (2) inflation and (3) risk diversification.

Reportedly, the 2015 global financial literacy rate is 33%. This is not comforting, and underscores a deeper issue plaguing many societies, both the wealthy and economically deprived.

Financial Decision Making is a Lifestyle

Some financial literature have extended the definition of financial literacy beyond understanding the basic financial concepts, to a person’s confidence in using knowledge to make effective decisions. This definition emphasises financial behaviours and lifestyles (spending habits and financial choices) which are sometimes as deeply rooted as diets inherited from parents.

The Scripture admonishes, “The wisdom of the prudent is to discern his way…,” Proverbs 14:8 (ESV). Poor financial lifestyles can be improved by examining root causes, thereby enabling the design of solutions for families, and systems of education, including church programmes. Findings from a 2005 survey of couples attending a premarital class at First Assembly of God Wortmanville (FAOGW), found less than 20% of the couples admitted to talking about money matters as part of their marriage plans. There are also accounts of academically inclined individuals with no inkling of how mortgages work for homeownership, compared with streetwise persons who own properties and businesses leveraging mortgage debt. These examples demonstrate that academic literacy does not necessarily translate to financial literacy, and the likely perpetual cycle that could result when couples begin the financial journey in silence.

#TrendingFinancialLiteracy

In spite of these dire trends, there is hope! Solomon has been trending financial literacy tips in Proverbs 21:5 (NIV), “The plans of the diligent lead to profit…” This tip underscores that wealth creation needs to be an intentional plan and conversation in our homes! Here are some solutions, underpinned by Kingdom principles, that can be explored:

Plan

↘Write down what you earn and spend then set new financial goals aligned with your education, career, and family plans.

↘Create a 1-year or 5-year plan including generation of a second income. This should include spiritual goals such as tithing and first fruits.

↘Challenge: Start writing a simple budget on Post-it notes this month.

Pursue

↘Be disciplined in spending and budget for vacation and recreation as part of your wellbeing plan.

↘Set mental spend limits before heading to the mall or determine to invest your next bonus in something that generates income or value to property.

↘If earning a second income require new cash flows, consider a mortgage, business loan or traditional box-hand. Be aware that not all debt is bad.

↘Finally, ask questions or search online for guidelines to becoming financially savvy.

Payback

↘Pay your tithes and offerings, pay yourself (savings) and settle debts (credit cards, loans, hire purchase or leases, etc.)

promptly. ↘Delaying debt repayment can lead to increased interest charges and high penalty fees, so advance loan payments in good times and request a restructuring in lean times..

↘Payback also means owning big overspends, as denial will sink you deeper into debt. When you overspend, just adapt your budget or tighten the belt in future months. Own it!

Role of the Church

In all this, we can celebrate the work of our local church in promoting financial literacy and wealth creation through several platforms; from the pulpit and within ministries such as the Women’s Investment Webinar. Sharing financial pitfalls and successes should not be tabooed. It is our hope that this edition will initiate the conversation on financial literacy in families and our systems of learning (i.e., Sunday School, Youth Ministries, etc.).

Take the Financial Test

Supposed you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money grow?

• More tha $102

• Exactly $102

• Less than $102

• Do not know

• Refuse to answer

Image that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

• More than today

• Exactly the same

• Less than today

• Do not know

• Refuse to answer

Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund (i.e. multiple investors and stock options)”

• True

• False

• Do not know

• Refuse to answer

Answer to questions above: Q1. More than $102 Q2. Less than today Q3. False