7 Consequences of Lack of Financial Education
The Organization for Economic Cooperation and Development (OECD) reported that, a very high percentage lacked basic notions of finance.
First of all, what is financial education?
It is the process by which people gain a better understanding of financial concepts and products. In addition to enabling them to develop the skills necessary to make informed decisions, assess financial risks and opportunities that improve their well-being and quality of life.
Lack of financial education and financial inclusion, two inseparable concepts
Education and financial inclusion are inherent concepts. In other words, they are cross-cutting and depend on each other. Inclusion comprises access to and use of financial services and products for all segments of the population.
Education, on the other hand, is related to the generation of competencies that allow people to understand and use these products and services as best suits them. For this reason, having accurate and reliable information on financial matters allows users to be aware of the risks represented by over-indebtedness, lack of long-term forecasting, and lack of planning and assignment of financial goals and objectives.
Financial education reduces social exclusion and is an indispensable tool for people of productive age.
What is the lack of financial education associated with?
Unlike those with higher incomes, people with lower financial solvency have little or no knowledge of finance and an indifferent attitude towards saving.
Gender differences continue according to the level of education they possess. Women have less financial knowledge. People have prejudices regarding financial matters.
An individual’s schooling may not be a good indicator of his or her level of financial education. The area in which individuals live (urban or rural) is associated with the level of financial literacy.
Check out: Best solutions for lack of financial education
What are the consequences of the lack of financial education?
Individuals should be aware of the importance of their training in responsible money management, the factors that can affect their decisions and the consequences for their well-being.
Therefore, below are some consequences of a lack of financial education.
- People are unaware of traditional sources of credit with more favorable conditions and end up paying for financial products and services with high interest rates.
- This generates debt. It increases the debt for financing interest, moratorium interest and other commissions.
- Bad decisions by users, with resounding negative effects on their well being, whose impact can last over time.
- Most do not make a comparison between financial products and services to make a responsible decision.
- People do not have a balance of their monthly budget, they do not have enough to cover their expenses, they exceed their capacity to pay and they only make the debt spiral grow.
- People are unable to face economic contingencies.
- Many countries of the world have low levels of penetration in financial services. People make decisions about savings, debt and investments that are not the most appropriate and that can harm their personal and family well-being.
Therefore, it is important to accelerate efforts to raise awareness and empower society and take advantage of financial products and services without incurring in expenses or indebtedness linked to wrong decisions.
This article has been written by Chandra Mehta.
Chandra is a seasoned banker with 35+ years of experience in banking and financial services industry. He’s a retired banker and has served as Chief Manager and Assistant Vice President in State Bank of India/or its subsidiaries. He has authored many articles on this site (allonmoney.com).