How to Improve Your Personal Financial Literacy

By webadmin on 08:54 am Aug 07, 2012
Category Archive

A Sense for Money

Financial literacy is the ability to understand and manage financial resources. The easy part of financial literacy is purely technical and requires you to understand financial discussions and issues. You need to become comfortable with the terminology: How does a redemption yield differ from a running yield; what is a credit default swap; how does a put option work?

The hard part is to develop a mature appreciation of what this all means and how it impacts your life: How you should plan for your children’s education and your retirement; how you can use insurance and guaranteed products to improve the performance of your investments; how you can turn market volatility to your advantage. Once you have developed this mature appreciation, you will have a real sense for money and will be properly financially literate.

Standards of financial literacy in Indonesia have improved substantially over the last decade. That is the good news. The bad news is that we are still way behind many of our Asian neighbors. There are many reasons why we are behind. Singapore and Hong Kong have a head start because they are regional hubs for financial services, so a higher proportion of their population is employed in the financial services industry.

Obviously, if you are employed by a bank or insurance company then you will be dealing with financial matters on a day-to-day basis. Hence, your financial literacy should be high. Indeed, just having friends or family members employed in the financial services sector is enough to improve your financial literacy through social interactions and discussions. The fact that schools in Indonesia teach very little in the way of financial literacy also does not help.

Another reason Indonesia lacks is the low penetration of many financial services products compared with other markets. For example, only around 5 percent of Indonesians have bought an insurance product, while in some Asian markets the majority of consumers have purchased some sort of insurance. Obviously the process of buying a product is a great opportunity to learn about the details and the subtleties.

Chatting with everyday folk in Indonesia highlights the differences with other countries. Taxi drivers, waiters and shop assistants in Indonesia very rarely have a good level of financial literacy. On the other hand, in some other countries, such individuals would often be active investors in the stock market and be all too ready to give you tips on the latest hot stock. They may even try to sell you an insurance policy.

A lot of people in Indonesia think that they need to have a certain amount of money first before they can think about financial planning. They tense up whenever they hear the word “finance” as many people think that it is very complex. They describe themselves with negative words; such as financially illiterate, financially stupid, financially unaware.

Many people also mistakenly believe that financial literacy is a skill or knowledge that they ought to be born with and ought to have picked up naturally as they go through life. And this is precisely what financial literacy is, it is a life skill that needs to be learned, like mathematics, language or social interactions. It is a life skill that needs to be learned and used from an early age, and not a luxury or a science that only a few can understand. Indeed, like any subject in school, some people will be good at it and some others will need help to understand it. 

So what can you do to improve your personal financial literacy? Reading the financial section of quality press is a good start, and the fact that you are reading this very blog post shows you have at least a healthy interest in the topic. There are books you can buy which aim to educate you and they can provide a good grounding, but be aware of “get rich quick” type of books. If it was easy to get rich that quick, then everyone would have done it by now.

There are various seminars and courses where you can learn about finances, but again be aware that these are normally promoted by companies and organizations that have something to sell. What they are selling may be a good product, but always go back to the principles we outlined in earlier articles before making any investment decisions.

Another way of learning is to trade in some stock market investments. Most on-line broker companies offer a trial or “phantom” account where you can practice building a shareholding without owning any actual shares or costing you any real money. When you gain more confidence you can then buy and sell stocks with your own money and can start with a low amount.  This can be a great learning opportunity as well, and you will certainly learn about risk in these current times when most markets are fluctuating greatly on a regular basis.

Another good way of learning is through financial education games which are being adopted increasingly by several organizations and governments globally as a fun and interactive way to learn about finances. Some of these enable you to learn about business cycles, stock markets, how insurance works, how savings plans work and how properties can be part of an investment portfolio. Indeed they can be great fun to play – within your family, or in teams at your place of work. It’s nice to make a million dollars – even if it is only pretend money.

For more handy financial tips, follow A Sense for Money on Twitter @senseformoney.

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Sense For Money here