Thursday, 13 January 2011

Creating Wealth - A Call for Financial Literacy

Generally, financial literacy is not something that is taught in schools or colleges. Yet, everyone uses money and therefore needs to have a certain level of financial to avoid the many financial pitfalls that exist. And this week, the Editor of the City A.M., Allister Heath, suggested that London's top banks should each make "an immediate and very large donation to a special new educational fund for financial literacy".

It's not the first time that he has made this recommendation. And, Allister Heath's suggestion goes beyond just the large banks. He believes that big insurance companies and wealth managers should become involved as well. It's a splendid idea that many people endorse. It remains to see though, whether or not the big financial institutions will have the foresight to actually put this idea into action.

Allister Heath is calling for an education campaign for children as well as adults to help them better understand personal finance. While nations pay attention to literacy levels, i.e. the ability to read and write, the same level of attention isn't paid to financial literacy.

Recently, the self-made millionaire Eben Pagan asked the following two questions:

Question #1: Where did money come from and why was it created?
Question #2: How does money and the money system actually work?

And the fact is that most people would not be able to provide a comprehensive answer to these simple questions. Relatively few people truly understand the nature of our monetary system - how it came into being, how it has evolved over the years and what the resulting changes really mean to their personal finances. Relatively few people are therefore equipped with the level of knowledge and comprehension that will help them to consistently make sound financial decisions.

There's a plethora of financial products available on the market and throughout your life people, even on a daily basis, you have to make a multitude of financial decisions – some seemingly simple and others more complicated - each of which will, nonetheless, either make you richer or poorer.

It was Albert Einstein who said that:

"Problems cannot be solved by the same level of thinking that created them."

There is currently a global recession and while many people are thriving, there are many facing severe financial challenges. Many of the tactics currently being applied to the economic situation are failing because they are tactics derived from 'old thinking' and also lazy thinking. What is needed is a fresh approach and to achieve this we need to elevate our thinking.

We also need an action plan that everyone can enthusiastically 'buy' into and one that creates a win-win situation for all involved. For instance, regarding the financial literacy campaign, one idea that has been proposed is to set up a new voluntary system of financial exams. Individuals passing these exams would be offered easier access to credit and possibly lower interest rates as they would be regarded as a 'safer' investment, i.e. less likely to default.

Whatever your views on implementing a financial literacy campaign, one thing is certain - the better you understand money the better you can use money to your advantage. The better you understand finance and our monetary system the faster and easier you'll be able to grow your wealth regardless of what the economy is doing.

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