Financial Education – Best Investment
The popular perception is that knowledge of financial concepts is essential to only those who are either engaged in business activities or dealing in finance as a profession.
After all, how much knowledge do you really need to make routine financial decisions or even plan your retirement, given the variety of tools placed at your disposal 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 be uncomfortable at times, and the same holds good for a majority of our financial decisions as well. How often do we hear about the ups and downs of the stock market, rising and falling interest rates, change in economic policies introduced by the state and even venture to discuss the same with co-workers or friends?
However, it need not necessarily mean that we really do understand what we are talking about. As a matter of fact, very few of us are able to appreciate exactly how any of these developments might affect our financial well-being. Then the logical question that arises is that why do we not make an effort to acquire enough knowledge about finance?
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 a lot of things, and finance is no exception. We are constantly bombarded by so much information about financial products in media that we seem to believe that we do know a lot about these things.
Despite being fully aware that most of the information presented in media is intended to promote certain financial products and brands, we start taking them at face value and seemingly accept it as true at a subconscious level. This 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 in the form of well-founded advice from a knowledgeable acquaintance, whether it is a friend, colleague or some relative.
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This is not to say that we stop trusting those we know well enough, but the simple reason that brings added value to this advice is the assumption that someone who knows us may not be motivated by commercial interests, unlike a professional advisor, whose advice could be influenced by these factors.
However, what we fail to realize is that despite the best of intentions on the part of our advisor, we cannot be sure of their level of knowledge and have little idea whether that advice fits in with our individual needs or not.
Is Any Advice Good Enough?
Taking this argument one step further, it would not be too far-fetched to say that even professional investment advisors may not be able to help you make the best investment decisions possible. The reason for this is simple, that almost everyone, including professional advisors, would be driven by their own motivations and understanding of what you may need but it need not be the right thing for you. Sounds confusing?
What is the Solution?
The fact is that we live in an increasingly complex world where technology is advancing at an unprecedented pace, and along with it, we are witnessing fundamental changes in almost every area of life, whether it is 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.
Today, we are inundated with such a multitude of options to choose from while making investments that it leaves us almost clueless. Even the best of financial advisors would be able to provide you with not more than a hazy idea of how exactly a particular form of investment works and what factors may influence the outcome.
All this is due to our own 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 a financially literate individual.
What Do We Mean by Financial Education?
Financial Education is nothing but the ability to make informed financial decisions by means of acquiring an understanding of the fundamental financial concepts. To begin with, when you open a bank account, you should know how it actually 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 card holder, you should know how it works and avoids incurring real debt. In short, financial education is about 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.
It may sound like it is necessary only for market investors, but it is not so in fact. 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
In an international study conducted by OECD (Organization for Economic Co-Operation and Development) on financial education, it was revealed that the level of financial education was rather low in most of the countries, including both developed and developed economies.
The study titled “Improving Financial education” made a number of recommendations to governments on improving awareness o fundamental financial concepts in average investors.
It was made particularly clear in the set of recommendations to encourage financial education from as early an age as possible. Another salient point which emerges is the dissemination of “unbiased, fair and coordinated financial education,” and “as clearly distinguished from commercial advice.”
The extent of Financial Uneducation
It was found in the study that a large part of local populations in even developed economies was not 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 been on the rise where credit is easily available but with consumers having little or no knowledge of debt management.
It may seem like financial education is closely co-related to education and income levels in general, but on the contrary, it was found there was little difference in terms of financial awareness between highly educated consumers with higher levels of income and less educated low-income consumers, stressing on the need for financial education for one and all.
One of the most worrying findings by OECD was the fact that a large number of consumers overestimated their level of financial awareness as compared to what they actually 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.
This prevents a lot of people from learning the basics, whether it is about cooking or about investing your money. While hopefully, you can live easily with a culinary misadventure once in a while, but 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 own levels of knowledge in finance without making an overestimation. Chalk out a rough plan for financial education, starting with the very basics and keep testing your knowledge with any number of online tests designed to help you make an objective assessment.
Enrolling in an online or contact classroom learning programs 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 come to realize that no financial decisions are simple; we are simply made to believe that way by seasoned financial advisors and agents with vested interests.
As simple a decision as getting a credit card can potentially 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 can affect your finances adversely if you did not have a viable repayment plan in place.
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 might have made it a point to read the document first but what about that fine print detailing the terms and conditions of a contract? If you did go through that, well, congratulations are in order, 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 that you need to diligently study the fine print first.
While you may have signed up 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 which can play a critical role in ensuring future security of your family.
As a matter of fact, one of the recommendations made by 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 OECD are non-binding on governments and institutions, it might be best if you take a cue and make an effort on your own behalf to get to know everything there is to know before signing a document.
Learn the Difference between Investing and Gambling
You might think that the stock market is a rather unreliable place to put your savings in, and you would be right for the most part of it. However, what about those much-trusted insurance, savings or retirement plans offering a much higher level of financial security, even if at the cost of 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 and if the consumer is too cautious he or she is handed a rather 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, which you make without understanding it, is potentially a bad investment, and akin to gambling.
It is the knowledge that sets apart investing 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 gambler, depending on how you make financial decisions.
Usually, when a product offers much greater than usual 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 in anything that you don’t understand.
Begin Financial Education As Early As Possible
The best thing you could do to come in the clear on financial issues and potentially 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, do not get carried away by a false sense of being informed as you begin to gain a new understanding of finance.
To avoid it, enroll for one of the many financial learning courses available. The most important thing, 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 him or she earns a lifetime of financial security.
Conclusion – Financial Education
Most of the people tend to underestimate the significance of financial education by thinking it is all about handling money. Though arguably, discovering the value of money and learning the art of managing it efficiently is rewarding enough in and of themselves, 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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