How financial literacy can make the world a better place

Smart money skills can help to reduce poverty and inequality, and promote stability in communities

Financial literacy aids people in making better decisions that can lead to improved outcomes, such as higher savings. Getty

Few things empower people more than understanding how money works and how they can use this knowledge to ensure a financially secure future for themselves and their families.

Every life decision they make — from pursuing higher education and choosing a career, to selecting a job, car or credit card, taking out loans, starting a business, getting married, having children and planning for retirement — is intricately linked to their understanding of money.

How well they grasp the financial ramifications of these decisions will directly affect the quality of their lives.

Yet a third of the global population lacks this knowledge and understanding, and many live salary to salary, steeped in debt and unprepared for retirement.

This is largely the norm for a large chunk of the population. These individuals are less likely to save, more likely to make impulsive purchases and more likely to max out their credit cards.

The consequences of these actions are not limited to the individual or their family, but they also affect communities and the nation at large.

Social sustainability involves creating more inclusive societies, enhancing the empowerment of citizens and fostering more resilient communities, according to the World Bank.

Promoting financial literacy has an indisputable role to play in all these aspects.

Financial inclusion and financial well-being

Financial literacy is an important tool in ensuring and promoting financial inclusion. It can help people to navigate the financial system and have access to financial services.

Financial literacy also helps in reducing poverty and social inequality, and promotes financial stability in communities.

It aids people in making better financial decisions that can lead to improved financial outcomes such as higher savings, lower debt and greater wealth accumulation.

It can also help people to avoid financial pitfalls such as high-interest debt and fraudulent financial products.

A study published in the Journal of Financial Planning found that people who were more financially literate were less likely to engage in risky financial behaviour.

More informed financial decision-making, higher levels of financial confidence and financial well-being are the evidence-based outcomes of financial literacy campaigns.

There is also evidence to suggest that financial literacy can have a positive impact on economic growth.

A study by the World Bank found that countries with higher levels of financial literacy had higher levels of saving, investment and economic growth.

Mental well-being and more

There is more to strengthening communities than simply promoting financial well-being and economic growth.

There is the crucial aspect of mental well-being to consider, which is rightly getting a lot of attention in recent times.

However, financial literacy initiatives can also deliver on this front.

Research shows that financial stress is associated with increased risk of mental health problems, including depression, anxiety and substance abuse.

A study published in the Journal of Family and Economic Issues found that financial insecurity was associated with increased levels of psychological distress and lower levels of life satisfaction.

Financial literacy initiatives can help improve mental health outcomes by reducing financial stress and promoting financial well-being.

The Journal of Consumer Affairs found that people who experienced improvements in financial well-being also experienced improvements in mental health outcomes, including reduced stress and a better quality of life.

While the link between financial literary and mental health is more commonly studied, it is a small leap of logic from here to see how this impacts physical well-being.

Financial stress has a detrimental effect on an individual’s health, causing headaches, backaches and digestive problems, among others.

Empowering people with the financial education that helps them make financially sound decisions directly combats the source of stress and seems like an easy win.

Inclusive, empowered, resilient

It is abundantly clear that financial literacy has a major role to play in the building of inclusive, empowered and resilient societies.

This is not simply in terms of financial and economic well-being, but also in terms of physical and mental well-being.

These outsize positive outcomes that are an effect of financial literacy initiatives should spur us on to advocate for and invest in these initiatives if we truly value social sustainability.

Marilyn Pinto is the founder of KFI Global