Financial Literacy Month is here.
Financial literacy and its core values are what drives the Tarabut Gateway team every day. We believe in a world where money management should be easy and available to all, managed through smart technology, connectivity, and data analytics.
A bit of background first. Historically, financial literacy in the Arab world has been low. In the region, the UAE has the highest financial inclusion rate at 46%, followed by Bahrain at 39% and Saudi Arabia at 31%. (source: FinTech news). Compared to other areas such as Europe with countries like Norway and Sweden both leading the world with the highest rates of financial literacy at 71%, we are still some way off. (Source: S&P Global FinLit Survey)
So, what is Financial Literacy?
Financial literacy is the ability to understand how to make sound financial choices so you can confidently manage and grow your money. This includes the knowledge of making appropriate decisions about personal finance, such as investing, insurance, real estate, paying for college, budgeting, retirement, and more (source: Investopedia)
Why does this matter?
Financial literacy affects everything from your day-to-day spending to long-term financial decisions, and this will have implications for individuals, economic development, and society overall. The consequences of not being financially literate can lead to uncontrollable credit card debt, and ultimately rising bankruptcies. That is without even considering the mental pressures added to both individuals and SME’s.
This Covid-19 crisis is the ultimate test for various individuals, and families to balance their mental and financial wellbeing, and these two elements come hand in hand. When someone is faced with uncertainty on their income, job without any clear steps – it causes panic. However, with a plan for what can be controlled, and awareness of means of support such as these informative articles, financial tools, and guidance, there’s a way to balance.
What are the main components of Financial Literacy?
Earning, Budgeting & Investing
Spending more than you earn, and not knowing where your money is going are the main common problems, and what leads most individuals into debt. That’s why budgeting needs to be in place to help you plan and see the bigger picture.
Budgeting comes with 3 simple rules that you can follow when trying to get a car loan, buy a new house, and manage spending, and debt. The 28/36 Debt Rule, which helps you determine if you’re overspending on living expenses states that a household should spend no more than 28% of gross income on total housing expenses, and no more than 36% on all debt.
Whereas the 20/4/10 Car Loan Rule helps you avoid overspending on a car loan. In short, putting a 20% down payment on a vehicle, limiting your loan life to four years, and spending no more than 10% of your gross income should protect you from overspending.
Finally, the 50/20/30 Spending and Saving Rule is a general rule to keep track of your savings, and debt. Keep your expenses at or under 50%, 20% goes to savings, investments, and retirement, and 30% goes towards your personal needs; shopping, going out, etc.
Spending & Borrowing
We must prioritize spending in terms of need now, want now, or save for later. While most of us borrow money either for short-term purchasing needs like vacations or getting a new gadget or for long terms needs like saving up for your children’s’ education or owning a house…we need to be careful about not spending more money than we make.
The idea is to stay protected at all levels in your life; on personal, health, and social levels. Consumers need to understand risk management, insurance coverage, identity theft protection, fraud, and scams, to master self and family financial protection.
What are we doing about it?
In line with Bahrain’s key initiatives to further enhance financial literacy and investment awareness, Tarabut Gateway’s platform will provide solutions to enable consumers to manage their finances and optimization their assets. Thus, allowing people to take financial well-being into their own hands.
One of the goals of the platform is to increase financial literacy and inclusion beyond just owning a bank account.
Several awareness initiatives will be targeted towards those that are keen to learn about investing and saving, enabling them to fulfill their personal goals on wealth creation. Our team has been working diligently to create rich content, free tools, and workshops allowing you as a consumer to learn, absorb, and create your financial plans.
While we are doing our best to empower you to jump-start your financial wellness journey, you can kick-start the process yourself. We have collated a few of our favorite online courses to help you.
- Personal Finance on edX by Purdue University
- Investment Theory and Practice on Future Learn by The Open University
- Financial Markets on Coursera by Yale University
- Financial Accounting Made Fun on edX by Babson College
- Financial Planning and Budgeting on Future Learn by The Open University
The broader picture, and how Open Banking will support this shift?
There are plenty of opportunities for banks and financial companies alike to build innovative solutions that are available digitally. As we can see a shift towards digitalization, Open Banking will create a marketplace where customers can securely gain access to a new generation of digital tools that will help everyday people make better decisions based on their data. With FinTechs and banks collaborating, this ensures a “collaborative design of financial services” that can apply to specific groups of customers instead of the “one-size fits all” solutions.
With the use of artificial intelligence, machine learning, and predictive analysis – consumers will have a more comprehensible view of their spending and allow tools to manage their finance, automate savings, and learn to invest in a simple yet effective way.