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The importance of financial literacy
Financial literacy is increasingly important, and not just for investors. Find out what this concept is and why it is so important.
According to an OECD analysis, people find choosing a savings plan more stressful than going to the dentist. Why is financial decision-making so difficult? Lack of literacy is an important part of the answer, making this more important today than ever. Find out what it consists of and why it's important for everyday life.
What if financial literacy?
Financial literacy is the ability to make financial choices and handle money management assertively, choices that are part of our daily lives.
Financial education includes understanding how a checking account works, what it means to use a credit card, and how to avoid falling into debt. In short, financial education has a direct impact on families and investors, who are trying to balance a budget, buy a house, pay for their children's education and secure some income.
The lack of education has practical consequences and is not limited to less developed countries. Consumers in advanced economies, such as Portugal, also fail to grasp basic financial principles, which could help them understand and improve their financial context and manage risks more confidently.
The importance of financial literacy
Financial education is crucial in that it gives us the knowledge and skills needed to manage money effectively. Without it, financial decisions and the actions we take - or don't take - lack a sound basis. Moreover, financial literacy is more important today than ever.
On the one hand, the increasing sophistication of financial markets means that consumers not only have to choose between two different interest rates, but also between a huge variety of complex financial instruments with a wide range of options.
Another factor comes into the equation. The financial world today is more dynamic than ever before. In a global market, with many more participants and influencing factors, this rapidly changing environment is always being transformed by technological advances. Financial markets are faster and more volatile, but also full of false prophets and promises of quick wins, which require good judgement.
Financial literacy in Portugal
Some studies indicate that almost 20% of Portuguese people considered that they do not expect to have enough money to retire comfortably. In another study, based on answers to questions on personal finance, financial knowledge, investment and home loans, it was found that 16% of respondents revealed a total lack of knowledge and skills in the management of personal finances. What's more, 60% of respondents overestimate their level of knowledge and skills.
Studies carried out by Banco de Portugal paint the rest of the picture of financial literacy in our country. Around 58% get simple interest calculations right, but only 39% recognise the effect of compound interest. Regarding banking products, 82% correctly identify the balance of a checking account on a bank statement, but only 21% know what the spread is and 11% know what Euribor is. As for investment products, some know a little about shares, but only 4% know the meaning of guaranteed capital in a security.
Portugal ranks 13th in the area of financial knowledge among 30 European countries analysed. This The consequences of this go beyond the personal sphere. According to the OECD, financial illiteracy was one of the factors that contributed to the financial crisis in Portugal and, in particular, to its worsening.
The crisis and its consequences have underlined the need to strengthen financial literacy.
How to develop financial literacy
Financial literacy is not a luxury, it is a necessity. Proper financial education is the first step towards assertive money management and to focusing energies elsewhere: on hobbies, family, friends and areas of life that money cannot buy.
At Banco Carregosa, we are committed to increasing the financial literacy of our clients. In our Academy, you will find updated, relevant and practical information that you can use to increase your skills in this area.
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