The global pandemic is devastating millions of people’s finances worldwide. How can the consequences of the crisis be addressed? Experts consulted by the BBVA Center for Education and Financial Capability point to financial education as a fundamental way to build crisis-proof finances.
The economic impact of the coronavirus pandemic represents a challenge for millions of people around the world. One of the main problems that they are facing is the forced closure of businesses, with the ensuing loss of employment. “Some sectors will avoid the hard hit from the impact or may even benefit — sectors related to healthcare services and pharmaceutical products, telecommunications services and products, e-commerce of all kinds, food supplies, and robotics,” explains José Manuel González-Páramo, president of the BBVA’s Center for Education and Financial Capability Advisory Council. “But even these areas will not be able to escape the negative impact the forced closure of business activity is having on consumer demand and investment, particularly in sectors related to hospitality, entertainment, tourism, personal services and non-food related brick-and-mortar commerce.”
A more general economic factor compounds the problem stemming from the business crisis. “The immediate drop in asset values (including pensions, housing, and shares) undermines all projections of future earnings, which makes it extremely difficult for people to plan for the future,” says Helen Gibbons, member of the board of directors for Better Finance. Rolando Arellano, president of Arellano ‘Consulting for Growth,’ also points to the future repercussions that the current decline in economic activity will have, “resulting from the impact of lost income and new norms for consumption and living habits.”
Iron-strength financial health
In a complex landscape where uncertainty — both health-related and financial — dominates, experts recommend guarding one's financial health to the extent possible. According to González-Páramo, this factor is fundamental in the existing situation for two reasons: “First, because, although increased uncertainty generally provokes a visceral reaction, a kind of precaution mechanism, to add to our savings, in many cases these savings will be limited by virtue of the generally diminished foundation to our income. And second, because our ability to financially plan for the future (for example, to fund our children's education or prepare for retirement) is much more complex in the context of health-related and economic uncertainty.”
In order to strengthen one's finances and face these challenges, a minimum level of financial education is necessary. Knowledge that, as Helen Gibbons explains, should focus on four points: “Diversifying savings, maintaining a level of debt that is manageable, reviewing personal finances on a more regular basis, and using technology as a way to control one's finances.” In addition to savings, Rolando Arellano stresses financial inclusion for people in the informal economy who are living off their businesses because "having a relationship with the financial sector is how formal credit is secured.”
Financial education for all
It is now more necessary than ever to provide our communities with the knowledge they need in order to successfully manage their finances. “Financial education should be a higher priority for most people,” Gibbons suggests. “It should be delivered by mass media and by national and local public authorities.”
Financial literacy is a tool that can contribute to reducing vulnerable segments. “According to a recent BBVA Research study 56 percent of Spanish households are financially vulnerable (meaning, they could get by for nine months without taking on debt or downsizing the home),” José Manuel González-Páramo explains. “This level of vulnerability, which is excessively high both as an isolated figure and in comparison to other developed countries, would drop significantly over time with sustained improvements to the levels of financial education.”
As Rolando Arellano points out, invaluable lessons can be derived from experience with past crises. At least, in a country like Peru. According to a recent study by Arellano’s consulting firm, more than 80 percent of 600 participants surveyed are optimistic about the future recovery. “This shows how families are resilient and self-confident with regard to their capabilities," Arellano explains. “In fact, the reason cited for the optimism is that they have lived through other significant crises in Peru.”
The future is seen as full of economic opportunity for those who embrace financial education as “a good deputy, a helping hand, and at the same time preparing us for unforeseen events,” González-Páramo maintains. He recommends three initiatives in order to bolster financial literacy:
- Strengthen private-public collaboration through holistic financial education plans that are offered in the earliest years of school.
- Incorporate best practices and findings from behavioral economics into the digital solutions that are used by the general population on a daily basis.
- Act on the lessons learned from previous crises with respect to managing personal finances.
Experts agree that financial institutions play a fundamental role in helping society’s most vulnerable groups receive financial education. In the case of older people, support can be translated into “a few simple rules for managing income and daily expenses and saving for a rainy day,” explains González-Páramo. “Contact with the staff at the bank and simple messages sent to their smartphones could be very useful.” With respect to single-parent families, our expert believes that the “rules mentioned previously have to take the specific details of social and inclusion policies into account.”
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