CHAPTER ONE

INTRODUCTION

Background to the Study

The ability to manage personal finances has become increasingly important in today's world. People must plan for long-term investments for their retirement and children's education. They must also decide on short-term savings and borrowing for a vacation, education, emergency, a house, a car loan, and other items. Additionally, they must manage their own medical and life insurance needs (Chen and Volpe, 1998). Greenspan (2003) “today's financial world is highly complex when compared with that of a generation ago. Forty years ago, a simple understanding of how to maintain a current and savings account at local banks and savings institutions may have been sufficient. Now, consumers must be able to differentiate between a wide range of financial products and services, and providers of those products and services”.

Increasingly, individuals are in charge of their own financial security and are confronted with ever more complex financial instruments. However, there is evidence that many individuals are not well-equipped to make sound financial decisions (Lusardi, 2008). Studies in the United States of America have shown that people have inadequate knowledge of personal finances (KPMG, 1995; Oppenheimer Funds/Girls Inc (1997). They fail to make correct decisions because they have not received a sound personal finance education (Hira, 1993; O'Neill, 1993). This has resulted in the increasing new buzz around Financial Literacy through conscious education. The Economist refers to this as the global crusade which is under way to teach personal finance to the masses so as to make them literate in finance (Padoan, 2008). The need for financial literacy would continue to grow because individuals are expected to become more self-reliant (The Adult Financial Literacy Advisory Group, 2008).

Financial literacy is the ability to understand finance. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions through their understanding of finances. Financial literacy is more than a measure of knowledge, it also reflects competency in actively managing one’s own money from the point of accumulation to the point of consumption (Remund, 2010). Financial education can benefit consumers of all ages and income levels.

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