RIO DE JANEIRO, BRAZIL – In addition to seeing their debts grow like a snowball (due to the daily incidence of penalties, interest, and monetary correction), people with bad credit lose access to bank loans, overdraft, and credit cards.
An explanation for the high default rate is the country’s historically delicate economic situation, with low wages and high unemployment. But this is not the only cause. Unpaid bills also have an individual component: the so-called financial illiteracy. The expression, which refers to functional illiteracy, is recent and has been used by universities and institutions such as the World Bank.
The person is deemed financially illiterate when he or she does not deal with money in a fully conscious and rational way. They have no idea how much they spend per month. They do not worry about sorting out their expenses (food, transport, education, telephone, leisure) nor about knowing the burden that each category has on their personal budget. They buy on impulse and do not think whether the product is necessary and urgent.
The financially illiterate pay in installments, ignoring the burden of interest in the final price.
They use an overdraft and pay only the minimum amount of the credit card bill without realizing that in both situations they are taking out a loan – and an expensive loan.
They leave the money in the current account and do not apply it in investments. Sometimes they do not even save. Such behaviors are found in all social classes.
Experts say that, like all forms of ignorance, financial illiteracy is fought with education. For
this reason, in 2010, the federal government created the National Strategy for Financial Education, a public policy that brought together institutions as different as the Central Bank, the Ministry of Education and the National Consumer Secretariat in the creation and execution of projects that promote financial knowledge throughout the country.
Among the ongoing actions, one is aimed at retirees (who usually borrow and repay using consignment schemes) and another for women beneficiaries of the Bolsa Familia (who often support their children single-handedly).
Financial educator Alvaro Modernell, the author of 25 textbooks on the subject, summarizes:
“Financial education does not teach people to get rich, but rather to behave in such a way as to convert the money they have, no matter how little or how much, into a source of well-being, and not a problem.”
The most ambitious step of this federal public policy will be taken next year when all schools in Brazil will be required to provide financial education to students. The issue is set forth in the newly created Common National Base Curriculum (BNCC), a set of guidelines for private schools and municipal and state education networks to use when building their curricula.
According to Modernell, the best thing would be for parents also to take care of their children’s financial education, but this is not usually the case:
“Money is still taboo for many families. It is not a matter of friends, children or, in some cases, even spouses. More secret is kept about financial life than about sex life. If the person is in a comfortable situation, they are afraid of being robbed or being asked to lend. If they are in a poor situation, they do not want anyone to know about their professional failure.”
“That is why the mission of teaching children and youths about money is left to the school. If the school intends to prepare students for life, it cannot ignore financial education.”
Financial education will be present in all levels of primary and secondary education, not as an additional subject, but as a subject to be worked on simultaneously in various subjects. It is the same transdisciplinary tactic that is adopted with subjects such as healthy eating, environmental education, and traffic notions.
To young children, teachers will teach more generic and basic issues, such as the value of money, the path taken by food from the field to the home table and the importance of avoiding wasting water, food, and electric energy. Fables such as “The Grasshopper and The Ant” will show in a playful way why it is important to save for the future and not be short-sighted.
More specific and complex issues, such as interest, taxes and loan options, will be left to high school adolescents.
For teachers who have little familiarity with the world of numbers and spreadsheets, the advent of financial education may be a cause for apprehension. Many of them, in fact, are part of the contingent of Brazilians in debt up to their necks. Ruth Hofmann, a professor of economics at the Federal University of Paraná (UFPR), is trying to calm them down:
“Financial education is not about financial mathematics or accounting, but about changing habits and behavior. The approach is similar to that of nutritional education. Just as teachers show us that we need to eat fruit and vegetables and avoid fried food and sweets in excess, they teach us that it is important to stop spending on unnecessary things today, and start saving money for tomorrow, as this allows us to accomplish our dreams.”
After going through training, teachers of traditional subjects will see that there is actually no mystery. In History, they will be able to show old ‘réis’, ‘cruzados’ and ‘cruzeiros’ banknotes (all former currencies of Brazil) to explain what inflation is. In Geography, they will be able to use money from other countries to teach currency conversion.
In Literature class, Cecilia Meireles’ poem “Or This, Or That”, could start a debate among students about why we sometimes have irresistible desires for consumption. An excerpt from the poem says: “Either I save money and don’t buy the candy, / Or I buy the candy and don’t keep the money”.
In Portuguese classes, teachers will be able to interpret the text from a rental contract. In Physics, they can take an electric bill to the classroom and, based on the value of the kilowatt-hour (kWh) charged by the utility company, show how much it costs to take a ten-minute bath.
Of the 27 state education networks, Tocantins is considered the most advanced in the adoption of financial education. Some schools in the state even offer it in high school as an extra subject, taught once a week. Teacher Cláudia Rebelo, from the Vale do Sol State School in Palmas, says the initiative has produced great results:
“Many young people end up dropping out of high school because they find the classes too boring, too theoretical. When the topic is money, they are immediately interested, because they know that they are learning something that will be applied to their lives. Financial education has the power to reduce school dropout rates.”
According to experts, decades of past hyperinflation is one of the culprits for the national habit of spending the salary quickly, not keeping it. Many people still remember prices being reset daily at the supermarket. It was enough to leave the money in the current account for only one day for it to be worthless.
The situation changed in 1994 when the Real Plan stabilized the economy and tamed inflation. From then on, a significant number of Brazilians were able to escape poverty and join the middle class, and a flood of credit began to be offered to the population – from bank loans to installment purchases using a payment book, to unlimited installments.
The money came, but not financial education.
Financial illiteracy is not only measured by high default rates. Numerous studies confirm that, on the whole, Brazilians are truly unaware when it comes to dealing with money. A recent survey showed that half of all adults do not understand the logic that makes a sum appreciate when it is invested and depreciate when it is exposed to inflation.
Official evaluations by the Ministry of Education suggest that students are not learning the basics of mathematics. In a test for 5th-grade children, one of the questions contained the image of a few banknotes and coins with the indication of their respective values. Half of the students were unable to make the sum and state the correct amount.
For those who have lost control of their own money, life becomes a living hell. Serious financial problems usually lead to anxiety, depression, sleepless nights, declining work performance, family fights, divorce, and even suicide.
In addition to the individual cost, financial illiteracy poses a high price for the country as a
whole. Debt-ridden individuals are forced to reduce consumption. Industry, commerce and the service sector begin to sell less. Because of decreasing demand, workers in these areas are laid off, leading to higher unemployment. With the decrease in sales, fewer taxes are collected. The government loses resources that would be applied in critical sectors, such as health, education and public safety.
Concomitantly, in the face of high national defaults, entrepreneurs seek to protect themselves by raising the cost of purchases in installments, and the banks increase the interest rates on loans. When these rates get higher, the population tends to be at a loss.
This generalized financial illiteracy alarms the Senate. Last year, the Parliamentary Inquiry
Committee (CPI) on Credit Cards investigated the high interest rates charged to customers who take part in revolving credit and found the population to be unaware of the situation.
According to the CPI report, the government needs to demand that credit card issuers invest a percentage of their revenues in financial education and that shops and banks display posters with cautionary notices about the risks of revolving credit and overdrafts.
“Cigarettes and alcoholic beverages carry warnings of their harmful effects. It is necessary to do the same with debt. The State must respect consumers’ decisions if they decide to become indebted, but it has the obligation to alert them to the risks. Daily experience shows that consumers pay high interest rates because they do not have the minimum financial knowledge,” says Senator Fernando Bezerra Coelho (MDB-PE), who prepared the CPI report.
The Lower House has just established a special committee to study and vote on a Senate bill to develop tools to fight the over-indebtedness of the population (PLS 283/2012). Among the planned measures is an investment in financial education. The bill was drafted in 2012 by a committee of jurists, established by the Senate, with the task of proposing changes to the Code of Consumer Protection.
The world began to focus more attention on the financial education of people after the global crisis of 2008. They have taken steps in this direction in rich countries such as the United States, the United Kingdom, and Australia, as well as in developing countries such as Colombia, India, and Indonesia.
It was this very same trend that Brazil joined by creating, nine years ago, the National Strategy for Financial Education. These countries all share a common effort in schools.
“Results are better when we work with children and adolescents. In adults, bad habits are already more entrenched and behavioral change is more difficult – explains Andrea dos Santos Regina, executive manager of Corporate Responsibility at Serasa Experian.
She adds: – Besides, children are excellent multipliers of knowledge. They take home the financial education learned at school and are able to influence their parents and change the habits of the whole family.”
Scholars in the field acknowledge that the expression “financial education” is perhaps unfortunate. First, because it conveys the notion that it is a complex subject, which requires counting with a scientific calculator. Second, because it might lead one to believe that it is about those investment tips given on YouTube by trendy financial coaches.
“The term “financial”, in fact, intimidates many people – says Claudia Donegá, Project Coordinator of the Brazilian Financial Education Association (AEF-Brazil). – Among the various courses we offer, one is aimed at women who come to social assistance centers.
In the beginning, there was no interest, almost no one showed up. So we decided to change the approach. We stopped saying: “Are we going to participate in a financial education course?”. We went on to say: ‘Let’s talk about money?’. They accept on the spot, and the courses are full.”
Source: Agência Senado