What is meant by “financial literacy” ? What do we mean when we say a person is “financially literate”?
When a person who has worked so very hard in life to earn money and he at last realises that it’s about time he must somehow find ways and means to make the money so earned also begin to work as equally hard for him too…. now that’s when it might be said that he or she has become “financially literate”.
Literacy is a set of basic skills. Literacy is sufficient to enable a man to get by in life. It supports and augments livelihood.
Education, on the other hand, is the advancement, development and evolution of Literacy… and Education equips a man to get ahead in life. Education supports, enriches and embellishes life.
While Literacy lays the foundation for the superstructure of Education to be built upon, it might likewise well be said that Financial Literacy is the bedrock upon which the edifice of Financial Investment gets erected.
It is much easier in life to gain common literacy than to acquire higher education. Everybody can become literate but not everybody can get highly educated. Literacy is the neighbourhood public-school; Education is an Ivy League campus.
Likewise, financial literacy too is seen to be commonplace while financial investment is acknowledgedly in elitist space.
The difference between all the Literates and the Educated in the world, and that between the Financially Literate and the Financially Invested of the world, can both be attributed to cause and to effect in vicious circle i.e. the difference being what in today’s world is called Income/Wealth Inequality which in effect is really it’s own cause.
That difference between financial literacy and financial investment mirror imaging plain literacy and fancy education could not have been more starkly and more comprehensively pictured than as this Infograph below does indeed:
The 2 pie-charts read together tell us that the size of the US stock market capitalisation was around $42 trillion in 2019 .., (it’s $52 trillion in 2021… that’s another different post-Covid story… but let’s not go there) !
The $35 trillion, or roughly 85% of the US stock-market-value represents the asset-value of the investment-portfolio held by the top 1% of total households in America. And the balance is held as portfolio -investments by the bottom 50% of American households.
Compare however the way in which the Top-1% portfolio-investors and the bottom-50% householder-investors have allocated their respective investible-assets and you’ll be able to at once see the strikingly remarkable difference there is between what we distinguish as plain Financial Literacy and hit-shot Financial Education.
The highly educated 1% of American households allocate 61% of their assets to Equities in the stock-markets whereas the barely literate households invest no more than 4% in Equities! The bottom-50% householders instead put in 75% of their allocable-assets in Real Estate and domestic Durables!
The contrast is vivid and is a telling commentary on yet another dimension of the great social divide in America that characterises the income-wealth inequality of its peoples. According to US Govt census report cited below …
….. 88% of Americans are Literate but only 13% have a college Masters Degree or above. And the report reveals that (per 2017 statistics) , on average a person with an advanced degree earned 3.7 times as much as a high school dropout.
The different sets of numbers above — of education and household investment-allocation — therefore do all add up and corroborate the truth or insight that the difference between financial literacy and financial education is indeed a clear facet of the divide between ordinary literacy and higher education existing among the social classes of America at large.
The most interesting insight to be gleaned from the 2 charts above is however the difference between the behavioural patterns of the top-1% and the bottom-50% household-groups in America in the way they allocate their investible assets. The former group invests 61% in Equities and no more than 14% in Real Estate+Durables. In comparison, the latter group allocates only 4% in Equity but a whopping 55%+20% in the same!
Investing in Real Estate and Durables is investing for security in a life filled with present Anxieties and foreboding of future insecurities. It is really not an investment-outlook overly driven by Hope. Investing in Equities on the other hand is a choice wholly driven by both Hope and Ambition.
And that really and truly is the full measure of the difference between what we stated above as
— getting by in life and getting ahead in life ,
— between striving to augment livelihood and aiming to enrich life …
— between attending public-school to become literate and graduating with a Masters from Ivy League in America.
—- between investing out of Anxiety and investing out of Ambition.
Sudarshan Madabushi