Author: Daniel Chege
You are considered financially literate if you have knowledge of various financial dimensions and are proficient in financial principles and concepts like compound interest and ‘profitable saving techniques’ (Kenton 2019). Financial literacy is considered fundamental to developing positive financial behaviours, but where does this literacy come from?
Learning through Observation
Studies have shown for the large part financial behaviours are learned from observation and participation within the family (Barber et. al. 2010). Positive financial behaviours include managing credit, increasing savings, comparing competitors and choosing the right insurance. Often children adopt their parents’ financial behaviours. Here, positive examples include involving children in your finances when doing the grocery shopping, talking to your children about saving projects or reflecting on how they should spend their pocket money (if they receive any).
The Effects of Financial Literacy
Other influences on financial literacy include areas such as the workplace and school. Research has shown a positive association between children that work and an increased sense of responsibility and a ‘greater skill at money management’ (Barber et. al. 2010). Interestingly, the newfound independence afforded to college students leave them as one of the most vulnerable sectors of society at risk of becoming indebted. Individuals who reported a perceived control over their finances were positively associated with ‘overall life satisfaction’ (Barber et. al. 2010). Overall, financial knowledge and perceived control over finances contributes to well-being and will help young adults avoid debt.
Kenton, W. (2019). “Financial Literacy.” Investopedia. At https://www.investopedia.com/terms/f/financial-literacy.asp.
Shim, S., Barber, B. L., Card, N. A., Xiao, J. J., & Serido, J. (2010). “Financial Socialization of First-Year College Students: The Roles of Parents, Work, and Education.” Journal of Youth and Adolescence 39(12): 1457-1470.