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The Importance of Financial Education

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1. Introduction

Using a comprehensive set of de-identified consumers’ credit records, the paper evaluates the effects of the 2004 and 2007 Georgia legislative mandates requiring at least one semester of financial education before high school graduation on credit outcomes. First, results show that state-mandated financial education does not affect adults’ educational or credit records. Additionally, the findings reveal that the gender of students’ administrative records is either confidential by lawmakers or instructor demographic characteristics are excluded. Previous finance instruction from family/parent or in high school and the financial knowledge acquired throughout the duration of the course appear least as important as policy-driven mandates. These findings suggest that policy-imposed finance. The present findings complement recent quasi-experimental studies linking finance skills to credit outcomes in adulthood by demonstrating that the positive association reverses.

Many consumers underestimate the effects of debt on their financial well-being and underestimate their own risk of future hardship. This paper analyzes a nationally representative data set to evaluate the effects of high school financial education mandates in the state of Georgia. Students who are exposed to these mandates have the same financial linguistic abilities, the same access to personal finance products, and are up to 2 percentage points less likely to be delinquent on their obligations. Results suggest that financial education mandated in high school improves credit outcomes on a host of intense margins, including delinquent obligations and credit scores. Moreover, these effects appear largest among borrowers with the riskiest credit outcomes. The reduction in the share of individuals delinquent on their obligations is approximately 12% of the full sample’s implied baseline delinquency rate and 14% among borrowers in the arguably credit cautious prime-age sample. These policies also improve compositional credit scores and reduce new inquiries in the fourteen months surrounding the policy exposure.

2. The Benefits of Financial Education

Financial education has indirect results in terms of the financial characteristics of individuals. Knowing how to manage resources in a safer and more conscious way creates a feeling of personal well-being by having more control over your finances. Consequently, among other things, we have better physical health, mental health, and our relationships are more harmonious. The more money people have in the market, the more people there are who demand and access new forms of business growth. Therefore, greater national economic growth occurs and a more productive country. Finally, due to its potential benefits, financial education has attracted the attention of government organizations, the private sector, and non-government organizations (NGOs) who play an important role in increasing capabilities so that citizens can make informed decisions.

A financially educated population brings several benefits to a country. Some studies show a great impact by increasing savings and maximizing possible resources in social programs, such as law enforcement and early retirement. A population with adequate knowledge could demand services and products that are more accessible and useful for their needs. The application of salaries by citizens with this type of knowledge affects growth and development and is generally beneficial for the population. Banks or financial institutions interested in making investments, creating services, and products that are effective and fit the needs of individuals and companies imply lower transaction costs and risk. It also creates a favorable environment for inclusion by offering financial services that work for an unserved or underserved segment. In addition, job or business creation activities, knowledge work habits, production, value importer, and keeping the money in the market.

3. The Impact of Financial Literacy on Personal Finances

This study finds that financial education, especially if it comes at an early age, has an impact as well. Research looking at exposure education programs or interventions designed to improve financial literacy in different age groups (e.g., kindergarten to high school and adults) generally finds positive association between financial literacy and individual outcomes in a variety of areas. Very often, the impacts are conditional; weaker or stronger after certain characteristics or under some circumstances. For example, older adults who have already graduated from high school are likely to receive a higher rate of return on education interventions through improved decision making in the smart use of payday loans.

Do people who are financially literate have better personal finance situations? And is improving financial literacy linked to positive changes in personal finance behaviors? The empirical evidence on these questions is accumulating, and the answers are generally yes. The evidence finds that financially more literate individuals are more likely to plan for retirement, accumulate more wealth, are less likely to engage in expensive and high-cost borrowing behavior, and are less prone to fall victim to financial scams and fraud. They are also less likely to engage in high spreading gambling or lottery playing. Thus, financial literacy measures have content validity and are clearly related to individuals’ financial capabilities or functions. Longitudinal evidence that links changes in financial literacy with improved personal finance behaviors are hard to come by because financial literacy is a slow-moving characteristic and disadvantages related to it are likely to build up slowly as well. However, studies following students or military services personnel over time do provide evidence of the positive associations between financial literacy and subsequent improvements in financial behaviors.

4. The Role of Financial Education in Society

Responsible financial management is a fundamental aspect of being a well-functioning member of society, and when people are unable to do so – and when they are not able to support or protect themselves from their well-being, the social and economic implications of this inability may be significant. This educational failure, however, does not exist in a vacuum, and results that affect people can also have negative consequences for society as a whole. Finally, it will be governments and taxpayers who will shoulder the burden of these unfunded human costs. In their ability to pay – and with a growing and aging population – this burden will increase. To the extent unprecedented growth in the cost of programs designed to protect our aging population – a significant component of public debt as a headache – the recognition and abandonment of people who save their own retirement can both release some of this pressure and put the advice of young people on the path of self-realization in the field of savings.

Awareness in financial education: Adults should have one per current acquisition, management, increase or protection of their household or personal well-being. Financial education should develop knowledge, understanding, skills, motivation, and behavior to allow people to make financial decisions that are adapted to their circumstances so that they can take full advantage of participation and benefit from these services.

5. Conclusion

To reach the last few paragraphs, we rely on empirical evidence from several studies. Here is where other problems emerge. Even if the desire is great, various difficulties were encountered when trying to achieve our goals. Despite the availability of data on the use of individual financial services, only global indices were available on financial knowledge. Studying the effectiveness of student financial education can only be done in the short term, since it is difficult to measure adult financial behaviour. In addition, the measures were taken at different times, in different locations, with students of different ages, in mandatory and non-mandatory classes, which complicates the interpretation of the results. Moreover, financial knowledge can be transmitted in various ways. Also, success in the financial world is not due to the level of financial education only, but to the level of other important personal characteristics.

The importance of financial education is clear. Since money is a key resource, the ability to manage it is essential and is best acquired at an early stage. To overcome the vulnerability of young people in their financial life, understanding money and the role of financial institutions is fundamental. Financial education programmes can be a tool to make students better equipped when they have to make a decision about personal finances. Since the financial knowledge and the use of financial products improves with income and education, if most people are already educated in this area, great steps could be taken to make our society more equal.

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