Financial Literacy for Wealthy People

Being rich and having the opportunity to invest frequently doesn’t mean being an expert in the field. Financial literacy means “how much consumers have understanding” of finances, how credit works, and the potential hit to financial well-being that poor financial decisions can create for many, many years. In fact, a lack of financial understanding has been signalled as one of the main reasons many struggles with saving and investing. Every few years, in the USA, the Financial Industry Regulatory Authority (FINRA) issues a simple five-question test as part of its National Financial Capability Study, which measures consumers’ knowledge about interest, compounding, inflation, diversification, and bond prices.

In UE, the European Central Bank develops many occurrences involving other Institutions and Universities in the matter. The same is proposed by many Italian entities, both financial intermediaries and associations of any kind. We need to be aware of fake literacy that is, on the contrary, an inducement to buy. On its most recent test, only 34% of those who took the test got four out of five questions correct, which suggests that the basic economic and financial principles that underpin these problems are widespread and that the contents of the matter are opaque and/or misunderstood.

Indeed, in the UE, several changes in consumer habits and financial products have made it harder for people to manage their finances. In the past, most people used cash for daily purchases. Today, credit cards are more frequently used. In 2020, credit use accounted for 25% of payments, up from 21% in 2017. The way we shop has also changed. Online shopping is now the top choice for many, which can make it easy to use and overextend credit, an all-too-convenient way to accumulate sudden debt quickly.

Meanwhile, credit card companies, banks, and other financial institutions are inundating consumers with credit and investing opportunities, matching the ability to apply for credit cards or pay off one card with another and creating opportunities for cross-selling. Investing alternatives are abundant, complicated and frequently homologous. Without the proper knowledge, it is easy to get into financial trouble. Financial planning is long term, and people cannot depend on one-time windfalls such as the recent stimulus checks sent due to the American Rescue Plan and the UE NextGen-Ue Plan linked to the PNRR, stated by each country and approved by the UE Commission.

Instead, individuals need to shore up their financial knowledge to manage their day-to-day financial lives while also taking a longer view for the future. The most common behaviour is to devote our attention to short term views, also because we are not so much able to look forward. The truth is that we behave both as short-sighted and presbyopic, maybe sometimes astigmatic, with an eye looking differently from the other. From another point of view, the brain and belly think differently! Most people look only at the returns of his investments and not at the achievement of long-term goals.

According to Luigi Einaudi, the saver behaves like a multiracial animal: he has the memory of an elephant, the fear of a rabbit and the speediness of a hare. According to me, maybe he has also the sloth of a panda, as a consequence of a too much high level of perceived but not actual protection. My dear wealthy reader, do you know your level of financial literacy? An interesting innovation is going to be offered by some specialized financial intermediaries: a service of financial literacy with the co-operation of qualified trainers and based upon full independence from investment houses and asset managers. Individual coaching, tailored to the characterful needs of each scholar.

I am very proud to have been chosen as one of the teachers for training, not for advisory. Opening the mind not closing contracts!

Article edit by Giuseppe G. Santorsola
Full Professor of Asset Management
Corporate Finance and Corporate & Investment Banking
Parthenope University of Naples