Researchers into the human condition have often found that too much choice is not good for modern consumers. An overabundance of options can often lead us to take the simplest options, and in many cases, simplest does not equal best. The truth is that, sometimes, less really is more.
When you have 300 different types of anything, even simple decisions can become hard work. Just popping out to the shop to buy some cheddar cheese is not a difficult thing to do; but, if you’re local shop just happens to be a cheese specialist, and you’re greeted with 20 varieties of cheddar, suddenly the simplest of tasks takes a more complicated turn.
The same can be said for the financial world. If the modern day consumer decides they need a source of short-term credit to help them through the next couple of months, they are greeted with a huge range of different options, from credit cards and overdrafts, to bank loans, instalment loans and payday loans. But which makes the most sense? That’s when financial literacy comes into play.
The role of financial literacy
Financial literacy is something we can benefit from at every stage of our lives, whether we’re saving to buy our first home or building a comfortable nest egg for our retirement. However, the truth is that many consumers around the world are unfamiliar with even the most basic economic concepts, so much so that sensible saving and investment decisions become impossible.
The rising debt problem
A well-informed consumer is the backbone of a strong and stable economy, but unfortunately, the latest data from the OECD shows that in many countries, household debt is spiraling out of control. In the years leading up to the financial crisis, household debt soared in the vast majority of wealthy countries. A housing boom caused the ratio of debt to disposable income to increase by an average of 30 percent, to 130 percent. In some countries, this debt is reaching unsustainable levels.
Helping consumers make important decisions
There are very few datasets that provide information about the current levels of financial literacy. However, as the financial crisis has made clear, even the experts can struggle to navigate the financial system, so how are everyday consumers expected to manage?
A recent survey by the South African online loans business Wonga into e financial life skills gap found some worrying signs. For example, 77 percent of the 18,000 respondents didn’t even look at the interest rates or fees on credit applications. So, it’s clear that levels of financial literacy need to improve, but what can we do to bridge this gap?
The key is to start young. As our children grow up, the finance conversations we have should grow with them. Receiving a small allowance and saving for the things they want to buy, or opening a bank account, can both start to build the skills they’ll need when they’re older. Learning these essential skills at a young age can encourage an active interest in financial matters and develop the skills they’ll need throughout their lives.