Updated August 7, 2023
Financial Education – Best Investment
The popular perception is that knowledge of financial concepts is essential to only those engaged in business activities or dealing in finance as a profession.
After all, how much knowledge do you need to make routine financial decisions or even plan your retirement, given the variety of tools available to help with all the dreary calculations? On top of it all, you can always seek expert financial advice from an investment advisor or financial expert for a rather reasonable sum of money. That should take care of it. Or does it?
The truth can sometimes be uncomfortable, which is good for most financial decisions. How often do we hear about the ups and downs of the stock market, rising and falling interest rates, and change in economic policies introduced by the state and even venture to discuss the same with co-workers or friends?
Very few of us can appreciate how these developments affect our financial well-being. However, we need to understand what we discuss. Then the logical question arises: why do we need to acquire more finance knowledge?
What Stops Us from Acquiring Financial Education?
Overwhelming Power of Mass Media
One of the most important reasons is the overwhelming power of mass media. It is no secret that mass media plays a significant role in forming our opinion about many things, and finance is no exception. We experience a constant barrage of information about financial products in the media, and we know a lot about these things.
We subconsciously accept media information as true, despite being fully aware that it intends to promote certain financial products and brands. It is the power of advertising campaigns.
The Obstacle in the Guise of Help
Taking things at face value can have some serious disadvantages. Here, we are talking about the help that usually comes from well-founded advice from a knowledgeable acquaintance, whether a friend, colleague, or relative.
It is not to say that we stop trusting those we know well enough. The simple reason why this advice brings added value is that someone who knows us may not be motivated by commercial interests, unlike a qualified advisor whose recommendations might be subject to these variables.
However, we need to realize that despite the best of intentions on the part of our advisors, we cannot be sure of their level of knowledge and have yet to determine whether that advice fits in with our individual needs.
Is Any Advice Good Enough?
Taking this argument one step further, it is reasonable to say that even professional investment advisors may be unable to help you make the best investment decisions. Almost everyone, including professional advisors, is driven by their motivations and understanding of your needs. Still, it needs to be different for you. Sounds confusing?
What is the Solution?
We live in an increasingly complex world where technology is advancing unprecedentedly. Along with it, we are witnessing fundamental changes in almost every area of life, whether medicine, education, or finance. Even a couple of decades ago, things used to be much simpler in the world of finance, with relatively few avenues for investment and higher job security.
The abundance of investment options today inundates us with so many choices that we need to become more knowledgeable. Even the best financial advisors can give you a manageable idea of how exactly a particular investment works and what factors may influence the outcome.
All this is due to our ignorance of basic financial precepts. Do we need to say anything more about the need for financial education? Only financial education can help us make decisions as financially literate individuals.
What Do We Mean by Financial Education?
Financial Education is making informed financial decisions by understanding fundamental economic concepts. To begin with, when you open a bank account, you should know how it works; when you choose a financial instrument for investment, you should be able to figure your way around it and manage the element of risk efficiently.
As a credit cardholder, you should know how it works and avoids incurring real debt. In short, gaining an understanding of financial products, including but not limited to debt instruments, and knowing how to minimize your risks through a structured investment strategy is what financial education is about.
It may sound like it is necessary only for market investors, but it is not so. Financial education is even more critical for those managing family finances, which can help greatly with balancing a family budget, funding children’s education, acquiring a home, and choosing a suitable retirement income plan for future security.
Findings of OECD on Financial Education
An international study conducted by OECD (Organization for Economic Co-Operation and Development) on financial education revealed that the level of financial education was rather low in most countries, including both developed and developed economies.
The study titled “Improving Financial Education” made several recommendations to governments on improving awareness o fundamental financial concepts in average investors.
The suggestions emphasize the importance of promoting financial literacy from a young age. Disseminating “unbiased, fair, and coordinated financial education” that is clearly distinguished from commercial advice is important.
The Extent of Financial Uneducation
It was found in the study that a large part of local populations in even developed economies needed to be adequately acquainted with basic financial concepts, which led to an increasing number of cases where high levels of debt resulted in bankruptcy and foreclosures. Private insolvencies have increased, where credit is easily available, but consumers need to gain more knowledge of debt management.
There is a close correlation between financial education and education and income levels in general. On the contrary, there is a need for more financial awareness among highly educated consumers with higher levels of income and less educated low-income consumers, stressing the importance of financial education for everyone.
One of the most worrying findings by the OECD was that many consumers overestimate their level of financial awareness in comparison to what they knew, based on simple tests carried out for the same.
It is a simple psychological fact that if you feel confident enough about your knowledge and abilities in a certain area, you may not feel the need to get acquainted with the basics.
It prevents many people from learning the basics, whether about cooking or investing money. While you can live easily with a culinary misadventure occasionally, a financial misadventure may not make for a very interesting memory.
What Do You Need To Do?
To gain true financial independence, you need to assess your levels of knowledge in finance without making overestimations. Chalk out a rough plan for financial education, starting with the basics, and keep testing your knowledge with online tests designed to help you make an objective assessment.
Enrolling in an online or contact classroom learning program in financial education can also help you gain rightful confidence while choosing a savings plan or financial education planning your retirement.
Approach to Financial Matters
Here are a few pointers that can help you change your approach to financial matters;
No Financial Decisions are Simple
As you explore financial concepts, you will realize that no financial decisions are simple; we are made to believe that way by seasoned financial advisors and agents with vested interests.
As simple a decision as getting a credit card can impact your financial future substantially and lead to debt creation if used in an uninformed manner. Something as commonplace as getting a vehicle or home loan could adversely affect your finances if you did not have a viable repayment plan.
Read the Fine Print
Yes, we mean it literally! How often have you signed financial contracts and documents with nothing more than a cursory look? The surprising answer is more often than not.
While you may disagree because you made it a point to read the document first, what about that fine print detailing the terms and conditions of a contract? Congratulations are in order if you did go through that, but most likely, you did not.
While commercial agents selling a product may be in a hurry to get the document signed, you need to make it a point, probably much to their displeasure, to diligently study the fine print.
While you may have signed up for any number of email accounts while giving a go-by to the terms and conditions, no sane person would advise you to do so for a financial contract that can play a critical role in ensuring the future security of your family.
One of the recommendations made by the OECD was specifically about “small print and abstruse documentation” in virtually every kind of financial contract “with potentially significant financial consequences” and the need to make the consumer acquainted with the subject matter therein.
While the recommendations of the OECD are non-binding on governments and institutions, it might be best if you take a cue and make an effort on your behalf to get to know everything there is to know before signing a document.
Learn the Difference Between Investing and Gambling
You might think the stock market is a rather unreliable place to put your savings, and you would be right for the most of it. However, what about those much-trusted insurance, savings, or retirement plans offering much higher financial security, even at higher growth? The fact is that an increasing number of equity-linked options are made available these days for insurance, savings, and retirement plans which have made it quite difficult to choose a product.
Financial agents utilize this situation to their advantage and focus on the promise of higher returns from a product. If consumers are too cautious, they are handed a poor investment option with seemingly ‘safe’ returns.
The simple fact is that most of these investment choices are neither good nor bad, but the outcome depends purely on how you manage it. Any investment you make without understanding is potentially a bad investment akin to gambling.
The knowledge sets investing apart from gambling because where a gambler hopes to make it big, an investor knows how to achieve a reasonable financial goal. Now, you can choose to be an investor or a speculator, depending on how you make financial decisions.
Usually, when a product offers much greater than expected returns without a clear explanation of how it would do so, you are most probably in for a ride. It’s better to stay away and not put your money into anything you need help understanding.
Begin Financial Education As Early As Possible
The best thing you could do to come in the clear on financial issues and improve returns on your investments is to start educating yourself on the basics of finance. Start by getting acquainted with basic terms and their definitions, and contrary to what you might expect, you will find a great deal of new information right there.
Discussing money matters with family members and friends could be a great way to keep yourself and others around you interested. But a word of caution here, avoid getting carried away by a false sense of being informed as you gain a new understanding of finance.
Enroll in one of the many financial learning courses available to avoid it. The most important thing is to keep learning to become a financially aware individual and, if possible, gift your child with financial education to feel secure in the knowledge that it can help them earn a lifetime of financial security.
Conclusion – Financial Education
Most people tend to underestimate the significance of financial education by thinking it is all about handling money. Though discovering the value of money and learning the art of managing it efficiently is rewarding enough in and of itself, the true reward of financial education is in the peace of mind it offers. A wealth no one can take away from you.
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