What is financial education and what is it for?
We always talk about how important it is to have a good financial education,
but do we really know what this refers to or what it consists of?
In the following article we will start talking about the different meanings we can find about financial education and then give some tips on how to carry it out.
BANSEFI DEFINITION
For Bansefi, financial education is a process in which skills and attitudes are developed through the assimilation of comprehensible information and basic tools for resource management and planning, allowing individuals to make personal and social decisions of an economic nature in their daily lives and to use financial products and services to improve their quality of life under conditions of certainty.
OECD DEFINITION
“Financial education is the process by which individuals acquire a better understanding of financial concepts and products and develop the skills necessary to make informed decisions, assess financial risks and opportunities, and improve their well-being.”
That is why in Mexico, it is very important to create a far-reaching movement in favor of financial education as it is also an urgent and necessary task for several reasons.
Firstly, because there are large gaps in people’s financial knowledge.
Creating all this a series of adverse consequences for people, such as excessive indebtedness, lack of savings and prevention for the future, unproductive use of remittances and lack of clarity about the benefits of investing in productive activities, as well as the acquisition of assets, or the education of children.
On the other hand, it is also necessary and important to create awareness based on financial education, since the lack of information, together with the low penetration of the financial system, encourages the use of informal financial services (tandas, savings under the mattress, savings in animals, requesting credit from moneylenders), which are often disadvantageous and costly.
Benefits of good financial education
The benefits of having a good financial education are considerable, both for the personal economy and for the national economy.
On a personal level, financial education contributes to improving people’s living conditions, since it provides the necessary tools for making decisions related to planning for the future and managing those resources, and at the same time allows for having relevant and clear information to make greater and better use of financial products and services.
This is why users with higher levels of financial education tend to save more, which normally translates into higher levels of investment and growth of the economy as a whole.
In addition to this, thanks to financial education, users request services suited to their needs and financial intermediaries have a better understanding of their clients’ needs, which results in a greater offer of innovative financial products and services, increasing competitiveness and innovation in the financial system.
How to apply knowledge in financial education
It is not only necessary to repeat facts and definitions to really understand financial knowledge at a level that is suitable for success. That is why to make this understanding easier we need to talk about the 6 levels that come into play with cognitive learning, which is the type of understanding that is really needed.
To apply these 6 levels of learning to financial education, you have to:
Know
The basic terms and concepts, related to a particular financial topic.
Understand
This topic to a level where you really understand the concept, and how it is applicable in your daily life.
Apply
This knowledge to your own finances so you can build and grow a solid financial foundation.
Analyze
The impact of the decisions you made and adjust as needed. This is where you pay attention to the small details that can make or break your strategy.
Synthesize
What you learned in your overall financial plan. (Synthesis is essentially where you fit a specific item into the big picture).
Evaluate
Your success on that particular topic so you can go back to gain more knowledge or move on to the next topic you need to understand and incorporate into your daily financial life.
So, as we can see, it is very important to develop this knowledge and awareness from an early age, since the percentages of financial education in Mexico are still low compared to other countries and according to CONSAR, the figures become even more alarming when it explains that throughout their working life it is estimated that on average people will save about $434,714.00 at age 65. Therefore, with that amount, and at current prices, they could acquire a pension through a life annuity equivalent to only $2,181.00 per month.
That is why, seeing how important and basic it should be to create financial awareness and education from childhood, we will now give you 6 tips that will address the points in which parents should take care when teaching their children how to have a good financial education:
1. What are the basics:
It is important to explain to children how many bills and coins exist, as well as their equivalence to each other.
To do this, several examples can be given, such as how many $10 pesos coins are needed to make $150 pesos, or how money can be converted into products and services, explaining to them what they can buy with $10 pesos, so they can learn what purchasing power is.
2. How money is earned:
It is essential to teach children that money does not come from magic, but comes from work, which one performs and from which value is generated in exchange for money. They must be shown how to work and how to sell. A simple way to do this is to teach them to wash the car, take out the garbage or bathe the pet in exchange for a profit or sell a product that is fashionable among their friends.
3 .How money is managed:
“It doesn’t matter how much you earn, but what you do with the money that makes the difference.
The secret lies in money management, which involves the following: firstly, expense control, which means not buying for the sake of buying, secondly, simplification, which refers to buying what is really needed or planned, consequently there is planning, which is making a budget of the expenses you have, and finally, management, knowing where to allocate the resources you have.
4. How to invest:
If a child is to become financially free, he needs to learn how to invest his money. The younger they learn, the faster they will achieve it. Basic investment concepts should be explained to them and a good exercise is to start teaching them to invest in CETES for children, so that when the child receives his weekly money, a part of it will be set aside for investments and deposited in CETES (in the bank or through the portal). This is a great incentive for the little ones, since they will see their money grow and it will motivate them for when they grow up.
5. Debt management:
Debts are one of the biggest problems that our society has, the faster children learn how debts work, the better: one of the ways to start doing this, is to teach children to measure their impulses to borrow and make them understand that every time they ask for money they will have to pay 10% of their weekly payment, this, although it sounds a hard option, with the passage of time is of great benefit to children.
6. What does financial education consist of?
It is important that children, learn from a young age through courses and workshops about their finances, so that when they are adults and must make important decisions, they have the necessary tools to take advantage of opportunities and be aware when making a decision.
Finally, with this knowledge, you should be able to achieve financial stability and overcome the typical challenges you may face in your financial life.
