Modern life requires us to know how money works. We don’t need to be financial whizzes, but we need to know the essentials and, importantly, acquire the skills and modify our behaviours if we want to be financially independent and secure. It’s this blend of knowledge, skills and behaviour-modifying experiences that constitutes financial literacy.
This week I chatted to Sharon Hamman, Senior Legal Adviser at Momentum, who shares my concerns about how South Africa’s low level of financial literacy is impeding economic growth and progress in addressing inequality.
She says people become more money-savvy when they start earning and gain experience in managing the money they have earned. “All those little actions you do – opening a bank account, researching interest rates, applying for a credit card – and the experiences you go through – getting into trouble repaying a debt, for example, and realising you need to change your behaviour towards money – all contribute to your level of financial literacy,” she says.
However, education is a prerequisite. Before going out to earn a living, South Africans need to know, for example, the various types of financial products available to them and have a grasp of concepts such as value, compound interest, inflation, risk and credit.
“Financial literacy is built on the foundation of education, because that is the starting block,” Hamman says. “Your experience with financial matters, your exposure to finance in everyday life, is probably what would eventually contribute towards a higher financial literacy score. But if you don’t have the foundation of a basic financial education, you don’t know what questions to ask yourself and how to change your behaviour.”
Financial literacy as a human right
Without the right foundations in place, South Africa is unlikely to conquer its inequality problem.
“In a country where most people remain vulnerable to economic hardships, financial security is a right that we should all be fighting for. This won't happen by chance. It requires planning, preparation, and the right mindset,” says Hamman. “In recently marking Human Rights Day, we should also champion the right to financial empowerment, ensuring everyone has access to basic financial education and the tools they need on their journey to success – you do not know what you do not know – so the first step is to know.”
She believes financial education should be embedded in the constitutional right of basic education. “If you look at the definition of basic education and then drill down and look at the ‘segments of the cake’, financial education should fit into that cake, and it doesn’t,” Hamman says.
Research studies
Financial literacy in South Africa was last comprehensively measured by a Human Sciences Research Council/Financial Sector Conduct Authority baseline survey in 2020. The average score on an index out of 100 points was 51. This was down from 55 points, measured in 2017.
Hamman says although other countries may have higher scores, research studies tend to show similar demographic patterns.
“If you consider some of the research done, not just in South Africa, but worldwide, on financial literacy and its impact on society, it shows that wealthier people have higher financial literacy, whereas in poorer communities it remains fairly low, which obviously fuels inequality. And then just looking at middle-class households, you would typically have one person in the home who is more financially literate, most often the male breadwinner. Men generally tend to be more financially literate than women because they have traditionally made the financial decisions, done the budget, and earned a higher salary. Even today when advisers consult with clients, many women still defer to their husbands on financial matters.”
Basic education
There have been various initiatives from the government and the private sector to improve financial literacy in South Africa. Financial institutions, under pressure from the FSCA, are doing more to educate consumers.
But Hamman says more needs to be done at school level. “This is not something you can teach in a single class in matric; it’s something you have to build on over time. If you look at what kids are taught today – economic studies and maths literacy – there are elements of financial literacy, but there is no golden thread bringing it all together. So, they learn about the economy and how it works, but nobody tells them that, for example, when they get a job, they have to be productive and contribute to the bottom line of the business to be valuable. And when the penny drops, they look at the job in a different way, because it means that ‘financially, I have to make sense’.
“The lack of this “golden thread” may be seen when children have a trading day at school, where typically they set up stands and sell goods they may have made themselves.” Hamman says this could easily be taken a step further by letting the children invest their proceeds in various types of investments and then monitor how the different investments perform.
Maybe it’s time to involve the Department of Basic Education?
PERSONAL FINANCE