What are the consequences of a lack of financial education?

Not knowing the basics like what an interest rate is, or how to budget, can cause you to lose up to 30% of your annual income.

Although the financial education It is fundamental in the life of any person, the reality is that it is an area that, in general, is not studied in schools or universities, unless it is in careers that are related to the subject.

According to a study conducted by Standard and Poor’s, on average, 30% of adults in Latin America have financial education. In the case of Ecuador, the percentage does not exceed 25%.

According to the Organization for Economic Cooperation and Development (OECD), the financial education It is “a process in which consumers and investors improve their understanding of financial products, concepts and risks in order to develop skills and confidence to make informed decisions that improve their economic well-being.”

In other words, the lack of financial education It means that not only can basic savings and investment decisions not be made, due to gaps in concepts such as value of money in time, what is a interest ratewhat is a budgetamong others.

In this context, people can be victims of loans with abusive interest rates and even, they can make use of informal loans or chulco. They can also become over-indebted or fall for fraud and scams of all kinds.

The main consequences of a lack of financial education are:

1.- It is more difficult to evaluate risks and financial opportunities. This makes financial decisions more risky and potentially damaging.

2.- It puts anyone looking to be financially secure at a disadvantage, as they will not know if they are taking financial decisions correct and may increase the chances of loss due to fraud or scams. On average, up to 30% of the income annually for bad decisions based on ignorance.

3.- It can lead to having large amounts of debtWell, if you don’t know how to compare between interest ratesyou cannot choose the credits that are most favorable to you, or decide when it is good and when it is not good to borrow.

4.- Magnifies the mental problems associated with debt and reduces the chances of finding a suitable solution to get out of them. In other words, it increases by more than 80% the chances of suffering from financial stress.

5.- It can lead people to resort to informal loans, or chulcowhich are not only harmful to your financial healthbecause they have high interest ratesbut they can also put you in danger.

6.- If you do not have a budget, it is very likely that you will spend more than you earn and have to borrow, which leads you to be in a spiral of debt.

7.- People do not have the resources to deal with an emergency or unforeseen event.

8.- The income during retirement or retirement are up to 60% lower because no mechanism of compensation was implemented during active working life. savings or investment thinking in the future.

What can you do?

Start educating yourself. Today, there are endless free materials you can get online. There are portals that explain the most important terminology to you; there are also Podcasts, Videos on Youtube, books and all kinds of material with which you can start educate yourself financially.

A good first step might be to start with a self-analysis of your actual financial knowledge. This self-analysis can be done, for example, with the test called Big Three or the Big Three, as explained in the note published by Diario LA HORA on January 28, 2022. (JS)

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