The importance of financial education in today’s world

The importance of financial education in today’s world

The importance of financial education in today’s world

The financial roots of the 2008 crisis led many EU countries to develop national strategies aimed at improving the financial education of their citizens. In Spain, for instance, the National Securities Market Commission and the Bank of Spain launched a four-year financial education plan that has been renewed twice since 2008. Similar plans were implemented in Ireland, Denmark, France or Portugal.

Among other things, these initiatives were intended to introduce financial education in schools, helping children learn the basics of finance from a very young age. But why should finance be part of the curricula in primary and high schools? After all, more finance-related subjects implies fewer hours for other subjects, something that can be criticized by those who consider financial education of secondary importance.

Ideally, schools should be allowed to choose their curricula autonomously, with little interference from government. However, in many European counties, the Ministry of Education plays an essential role in shaping the curricula of schools on a national basis. Hence, important curricula changes must be implemented in a top-down manner.

Financial education in early years is essential inasmuch as it is the basis of many important decisions we make later in life. Applying for a mortgage, planning for retirement or choosing where to invest your money require a sound knowledge of certain financial concepts. A good example of the importance of financial education can be found in the opinion most people have on stock markets.

Stock markets are usually characterized as casinos where investors gamble away their money out of greed. This idea isn’t only profoundly misleading, but it also shapes the way in which people make their saving decisions. In the period, 1950-2018, the US stock market grew at an 8.9% annualized rate (7.4% when adjusted for inflation), which means that the stock market is far from being a casino: it provides consistent returns over the long term. The corollary of financial ignorance in this matter is straightforward: financially uneducated individuals will avoid investing in stock markets, leaving their money in savings accounts that currently pay 0% interest in the Eurozone.

And this isn’t just an opinion. Existing evidence confirms the importance of financial education in making the right financial decisions during adulthood. For instance, knowledge on financial issues is positively correlated with higher returns. Similarly, financially illiterate individuals are less likely to plan for retirement, with the subsequent impact on their living standards after they retire.

Financial illiteracy doesn’t only affect saving and investment decisions, but it also impacts borrowing decisions. People with little knowledge on financial issues tend to draw upon credit card borrowing. This implies that they borrow at higher rates than financially educated people since credit card borrowing is comparatively more expensive than other forms of credit.  In addition, the overuse of credit card borrowing early in life tends to undermine credit scores, reducing the possibility of accessing other forms of borrowing in the future. 

Where do EU citizens stand on financial education? According to the 2015 Standard & Poor’s Global Financial Literacy Survey, Denmark, Germany, the Netherlands, and Sweden have the highest rates: between 65 and 75 percent of the population in these Northern European countries are financially literate. In contrast, less than half of the population in Spain, Greece, Italy or Rumania are financially educated. This shows that financial literacy is positively correlated with GDP per capita: wealthier countries tend to have higher financial literacy rates.

Applying for a mortgage or choosing the right investment vehicle for our retirement savings are situations most of us will have to deal with at some point in our lives regardless of our social and economic background. Financial education can help individuals make informed decisions regarding these and other important issues, preventing financial institutions from taking advantage of people’s ignorance on financial matters.

Luis Pablo de la Horra

Luis Pablo de la Horra
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