Beacon Financial Education: The importance of financial education
Beacon Financial Education has been informing us about a lot of things: financial freedom, retirement planning, wealth management, FATCA. But now they are going back to basics to discuss the importance of financial education, and why it would be very helpful for you to improve your financial literacy.
Seriously? Financial education for expats?
“Financial Education for expats? Really?” Beacon has heard that question numerous times. Some people felt it was patronizing or condescending to assume cross-border professionals are in need of financial education. After all, expats are expected to be highly-educated, highly-skilled and generally better-qualified.
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There are those who think that financial education is not relevant for this particular group of people, and those who assume that they know all they need to know to manage their wealth efficiently. Admitting you don’t know everything about money management is therefore perhaps harder for expatriates than for any other person.
So, why financial education? Remember: the people behind Beacon are expats too, having lived in multiple countries themselves. They are away from home, just like you, and they’ve encountered some financial challenges. Especially those with connections to the USA, who have to comply with the Foreign Account Tax Compliance Act (FATCA).
It proved much more of a challenge to manage their money than they had initially thought, which resulted in the founding of Beacon Financial Education. With the help of their advisor network, they want to pave the way for others.
Financial illiteracy is a global problem
But it was not just Beacon’s experiences that showed that well-educated professionals could improve their financial literacy. Over the past couple of decades, as financial illiteracy was gradually put on the agenda in many countries, G20 leaders and OECD governments began to officially recognize the problem and initiate projects to enhance financial literacy all over the world.
Their research showed that almost half of the inhabitants of 21 countries were not able to get the minimum target score of 70% on a financial literacy test, and you could conclude that as a result they are classified as “financially illiterate”.
Financial ignorance and overconfidence among the highly educated
Yes of course: higher education is positively correlated with financial literacy. However, it is incorrect to assume that everyone with higher education is indeed financially literate.
In countries like the USA, the Netherlands, Germany and Switzerland, 3 in 10 of the best educated were not able to answer three basic financial literacy questions – also known as “The Big Three”: questions about interest rates, inflation and risk – correctly. Conclusion: even the well-educated are not necessarily savvy about money.
Figure 1: Financial Literacy by Education % providing correct answers to three financially literacy questions, also known as “The Big Three”. Source: Lusardi Annamaria, Michaud Pierre-Carl, Mitchell Olivia S. Using a Life Cycle Model to Evaluate Financial Literacy Program Effectiveness. The Wharton School, University of Pennsylvania; 2014. (PRC Working Paper).
Other studies showed that highly-educated people are also overconfident and tend to overestimate their skills: like these self-directed investors in Canada, only 5% of whom scored the minimum target score of 66%. Only five percent! People who manage personal equity portfolios. People who say they possess the know-how, people who say that they are successful at what they do. Yet, they failed the test miserably.
The importance of improving your financial knowledge
Beacon believes there is always room for improvement AND that financial education is an ongoing process. Let’s summarize why:
Reaching your full financial potential
Being able to balance your income and expenses, to live debt-free (apart from maybe a mortgage), to set money aside and / or invest for retirement, to be financially independent, not having to worry about your financial situation, is the most important goal of financial education. To understand how financial markets and economies work, knowing where to find honest and correct financial information, and how you can act on that so that in the end you are better off financially.
Changing financial landscape
Those who are a bit older know it all too well. Your financial landscape is changing, rapidly. Your environment is more dynamic than ever. And it’s affecting you, also financially. For example, government support is decreasing in many countries all over the globe.The result is that individuals need to become more independent when it comes to preparing and planning for retirement, and other big life-changing events like unemployment or sudden illness or disability.
Another important factor is the rise of financial technology. Online banking and financial applications have made our life easier, yet are also a risk factor for getting into debt, being scammed and abused, or simple misunderstandings.
Preparing for the next recession
The question is not whether we will have another recession, but when we will have it. Approximately once every decade our economies are hit by a financial crisis. Where it is coming from is uncertain, although there are always warning signs. Knowing how economies and financial markets work can help you withstand the effects of the next financial crisis.
Understanding budgets and how to plan ahead
A recent study showed that most Americans continue to live from paycheck to paycheck. Even though the economy has grown over the past decade and unemployment is at an all-time low, people are still not able to put money aside for their future. And not just those with lower income and education levels. Only half of highly-educated respondents and those earning over 75.000 USD annually had started to save, and only about 10-15% of them have a rainy day or emergency fund (FINRA's National Financial Capability Study 2018).
Planning ahead has become more important. Decreasing government support is one reason; another is increasing life spans. We are becoming older. Which means that – if the current retirement age doesn’t change – we need to cover more retirement years than people had to in the past.
Expat finances complicate matters
Beacon has discussed it before in other publications - being an expat has its challenges… especially financially. Even more so for Americans and those with a U.S. nexus. Having to comply with FATCA, possible bank account lockouts, double taxations: it causes many headaches.
Also, it is very difficult for Americans to invest when living abroad, reducing the number of possibilities to manage one’s wealth and plan for retirement. There are new options available now, but still, being an expat makes personal financial planning challenging.
Start educating yourself – today!
There are many ways to educate yourself and improve your financial literacy. Fill out the form on this page and be the first to receive Beacon’s latest financial white paper on the importance of financial education and how you can improve your financial literacy.
In addition, Beacon Financial Education has scheduled four different webinars this fall that will help you get started. Check out the event calendar and sign up for one of the webinars. They are free of charge and will only take 30 - 45 minutes of your time.
About Beacon Financial Education
The Beacon Financial Education team consists of cross-border professionals. Beacon Financial Education provides free information – through tailor-made seminars, webinars and newsletters, all to fulfil the international’s need for financial control, stability and simplicity. They will host a number of different webinars over the next few months. Browse the Beacon Financial Education website to see their up-to-date event list.
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Beacon Financial Education does not provide financial, tax or legal advice. None of the information on this site should be considered financial, tax or legal advice. You should consult your financial, tax or legal advisers for information concerning your own specific tax / legal situation.