Financial literacy
According to the OECD, financial literacy is based on the combination of knowledge, skills, behaviour and mindset that an individual must possess in order to be able to make effective financial decisions to maintain their long-term financial well-being. However, according to the Eurobarometer, which measures the level of financial literacy in Europe, Greece ranks 24th out of 28 countries, with 19% of Greeks displaying a high level of financial literacy, 52% a medium level, and the remaining 29% –almost 3 out of 10– considered financially illiterate. But how important is it for people to have a financial mindset? Some of its benefits are:
You can make informed financial decisions
In finance nothing can be taken for granted. Even if a decision appears to be destined for success, no one can guarantee that things will turn out exactly as planned. However, only by having a good knowledge of financial instruments can you be more certain that any decision you make is evidence-based, and thus significantly reduce the risks and increase your chances of finding the most appropriate financial solution or action.
You can manage your finances more efficiently
As the Bank of Greece (BoG) aptly points out, financial literacy allows you to effectively manage your personal finances. It equips you with the right skills to be able to create and maintain a budget, track your expenses, set financial goals and prioritize your spending. This helps you avoid unnecessary debts, reduce financial stress and work towards achieving your financial goals.
You can ensure economic prosperity
Prudent management of finances, as practised by the financially literate, promises economic prosperity. This is because unnecessary risks are avoided, while the ability to save is enhanced.
To attain financial literacy, it's essential to have a grasp of specific terms that are often used in our daily economic lives, such as:
1) Investment grade upgrade: Investment grade is the level of a country's credit rating , above which there is a relatively low risk of default for its sovereign entity. Countries are rated by international rating agencies, who make their decision on the basis of a number of economic and financial factors, such as the challenges and prospects of each economy, its commitment to reforms, investment and so on. A good rating can have many benefits, since it impacts the government, banks, insurance funds and, above all, households and businesses, whose borrowing costs can fall –or rise– depending on how good the credit rating is.
2) Inflation: Each year the value of money falls, so a fixed amount may buy fewer products or services this year than it did last year. This is basically the meaning of inflation, that is the continuous increase in the general level of prices in an economy over a certain period of time which brings about a fall in purchasing power. A necessary condition for the existence of inflation is a rise in prices, as there is no inflation if prices remain stable, regardless of whether they are high or not. To measure inflation, Eurostat uses specific products, focusing on those that cost consumers the most (e.g. electricity). Europe has recently been experiencing high levels of inflation as a result of a series of events, such as the wars in Ukraine and the Middle East. In this context, the European Central Bank (ECB) has raised interest rates in order to limit the phenomenon to 2%.
3) Interest rate rises – falls – stability: Interest rates are, on the one hand, the cost of borrowing money and, on the other hand, the interest that banks pay to people on their savings. The ECB's decisions to raise, decrease or maintain interest rates at certain levels are not directly linked to these interest rates, although they can influence them. This is because such decisions lead to changes in the cost of borrowing for banks, which in turn shape their pricing policy on loans and deposits accordingly. This has an impact on demand and, therefore, on inflation.
4) Per capita income: This is, essentially, the average income per person in a given area and is derived from the calculation of total income in relation to the country's population. Usually this indicator is used to describe the standard of living of a country's people, although it does not take into account a number of parameters, such as, for example, any income inequalities.
5) Digital euro: Cash (banknotes and coins) is currently the only type of central bank money available to the public. Soon, money will also be available digitally, allowing citizens to make payments with a secure means of payment that is universally accepted across the euro area. This will be free for basic use, via a mobile app or physical card, and will also incorporate an offline mode, providing for situations of limited connectivity.
Understanding basic financial terms is a prerequisite for understanding the finances of households or businesses and the national economy overall, which greatly affect our quality of life.
Sources:
Eurobarometer on financial literacy: https://europa.eu/eurobarometer/surveys/detail/2953
Speech by Bank of Greece Governor Yannis Stournaras on “The importance of Financial Literacy”: https://www.bankofgreece.gr/enimerosi/grafeio-typoy/anazhthsh-enhmerwsewn/enhmerwseis?announcement=8b345f2d-6e00-42b0-a905-5eee42071757
Inflation, Wikipedia: https://en.wikipedia.org/wiki/Inflation
Digital euro: https://www.ecb.europa.eu/paym/digital_euro/why-we-need-it/html/index.en.html & https://finance.ec.europa.eu/digital-finance/digital-euro/frequently-asked-questions-digital-euro-and-legal-tender-cash_en