Imagine that you have a savings account with an interest rate of 1% per year, while inflation annually is running at 2%, writes Glenn Gillis, CEO, Sea Monster. After one year, with the money in this account, would you be able to buy more than you could today, less or exactly the same?

If you guessed that your money would be worth less than it did a year ago, you join the 64 % of Americans who answered this question correctly. This information emerged out of a pioneering study, designed by economists Annamaria Lusardi and Olivia Mitchell, that measured financial literacy levels in the USA in 2018. These economists discovered that only 30% of Americans were able to correctly answer all three of their questions. Low levels of financial literacy were also prevalent in developed markets like Germany, the Netherlands, Sweden, Italy, Japan, and New Zealand.

In South Africa, researchers who have developed their own index found that below-average financial literacy is common among women, young adults, high-school dropouts, the unemployed, and people living in rural areas.

So, what is financial literacy and why is it so important? Lusardi and Mitchell define it as knowledge about a few but fundamental financial concepts, while the Organisation for Economic Co-operation and Development (OECD) says financial literacy also requires having the skills and motivation to make effective decisions.

The Big Three

The inflation scenario, mentioned in the beginning, is one of the “Big Three” questions used to measure financial literacy in more than twenty countries. Once economists had developed a way to gauge financial literacy, they were able to investigate whether knowledge actually influences behaviour.

Empirical evidence published by Annamaria Lusardi in 2019 suggests that people with financial savvy are more likely to accumulate wealth because they are more likely to plan for retirement. Financial knowledge helps people to make informed decisions about spending and retirement. This is why interactive educational tools are growing in popularity – here and abroad.

A study published in 2015 by Lusardi and her colleagues supports the notion that these tools are having a positive impact. It found that novel educational programmes are “effective at increasing self-efficacy” and several of them contribute to improved financial literacy.

Moneyversity by Old Mutual is an example of how videos, quizzes and interactive games are teaching people about compound interest, bond repayments and saving for retirement. Similarly, Fundaba by FNB teaches people about entrepreneurship and running a business in a visual, bite-sized way that uses animation and infographics to bring the business owner’s journey to life. Capitec’s Livin’ It Up app is a strategic game in which the user has to balance daily expenses with aspirations of buying big-ticket items like a new home or car.

Apps and games are also changing the face of financial education by making it fun and accessible for a diverse audience in overseas markets. The idea behind Singapore-based startup PlayMoolah was born at the height of the 2008 global financial crisis.

The company’s co-founders decided to come up with a way to demystify money when they saw the impact of the credit crunch on ordinary people. PlayMoolah guides an avatar through a range of real-life scenarios from buying a house and getting married to the mundane task of paying bills.

Almost three-quarters of South African households are classified as “financially unwell” – according to the Momentum Unisa Household Financial Wellness Index – making a strong case for improved financial education.

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