Wednesday, 17th January 2018
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John Smiles

Qualified Financial Advisor

How important is financial literacy?

The importance of financial literacy has grown in Europe as financial markets have developed and because of demographic, economic and policy changes.

The needs of individuals and the financial products on offer have become more complex. Without financial literacy, full and informed participation of individuals in economic life is more challenging but becoming increasingly more important. This is a serious issue for EU Member States, many of whom now require increased personal responsibility for financial security, as state sponsored social security systems are retrenched and new market opportunities arise steadily in the financial sector.

Financial literacy is crucial for individuals and households, as our lifestyles change as a result of more frequent changes in employment and the increased incidence of divorce. Such changes create a need to adjust private finances regularly to suit new work and family circumstances.

Life expectancy has also grown dramatically, increasing people’s need for greater awareness of pension provision.

Financial literacy becomes even more relevant in the area of employment. Disrupted working careers require a sound management of personal finances in order to bridge gaps between two jobs, or to handle periods of working as an employee and self-employed at the same time.

This is important because more than half of all business start-ups are by people who previously became unemployed. The financial issues of small start-ups and microenterprises in general are similar to those of a private household. Many self-employed people do not have a separate account for their business. The increasing number of owner-managed enterprises contributes to the increased need for financial literacy.

Apart from managing financial resources, people need to manage their personal debt, the levels of which have increased markedly over the past few decades. Loan management, as well as household budgeting, has also become a field where specific know-how is necessary. The situation is further complicated by the increased complexity in financial products and services, amplified by the introduction of new distribution channels and the deregulation and globalisation of the financial markets.

Financial brokers provide an important education resource to help people plan for the future.

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