As part of its Science of Success festival, Momentum has released its Momentum Unisa Household Financial Wellness Index for 2023. It is a yearly report showing how South Africans are faring financially. This year there is quite a focus on financial literacy.
But why? And what is financial literacy? To be able to read, and add and subtract what is coming in and going out of your purse?
A popular definition of financial literacy is that a person must be able to understand financial things and have financial skills. This means they must be able to manage their money, budget, and know about investing.
According to Johann van Tonder, an economist in the Group Strategy team at Momentum who did a lot of the research for the report, it is crucial that people understand basic financial concepts.
For instance, can you calculate what your debt is costing you? Can you calculate how much your money will grow if you invest at the advertised interest rate?
Okay, mathematics is not everyone’s cup of tea. But if you can’t do the sums, you must ask someone to help you. Why do I insist on this?
The Momentum research shows how much better off people with financial skills are. Even if you are educated, and earn a high income, if you’re not financially literate, your money matters will show it. You’ll do worse than your equal who does know about money.
The same goes for the opposite. If you’re not that rich and not that educated but are financially literate, you will do better than your less well-off, not-so-educated neighbour who doesn’t know about money. Simply put, you’ll be wealthier, shows the research.
This is because people who know about money use their financial skills to convert their income to become wealthier.
They are also far better at setting financial goals. They implement and achieve them more easily and keep track of them. The Momentum research considered 27 financial goals and shows that financially literate households performed overwhelmingly better. These goals range from financial management and saving or investment to reducing debt and doing tax planning. Financially literate people also own more durable goods like houses and cars.
This is because knowing about money helps you in many ways:
- To evaluate options, consider risks, and make choices that align with your goals.
- To understand the principles of saving and investing so that you can build wealth over time.
- To help you understand the different types of debt so that you can take it out responsibly.
- To plan better for your retirement or your children’s education or the legacy you want to leave.
- To face milestones such as buying a house, starting a family or changing careers.
It can help you avoid a scam and will give you confidence. Even if you just know what questions to ask, a clever salesperson will think twice about talking you into something you don’t need or making wild promises that are not credible to start with.
The report concludes that financial literacy is fundamental for financial success and security.
Just how tough the current financial climate is, also receives attention in the report. Many people are battling to make ends meet and are losing sleep about where the extra money will come from. I believe spending a little more time reading up on personal finance will stand anyone in good stead. The basics of how investments work are easier than people think.
A plan and resilience will go a long way to help you on your journey to success.